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November 12, 2021 37 mins

We are often asked for a super basic, first principles explanation of Proof of Work. We make our best attempt to boil down PoW to its most basic points. 

We  discuss:

- What are the basics of Proof Of Work and how to think of it simply
- What's a good analogy and how it can be thought at as a game
- Some elegant aspects of PoW in the Bitcoin network design
- Data on ESG concerns  and how to think about Bitcoin's energy use long-term
- Why energy in the Bitcoin network is programmed to go down over time
- What makes an attack so difficult?

We do not provide financial advise in any form.  All information is our opinion and for entertainment use.

Every Podcast we add a video or podcast we think of as Value add:

Anthony Pompliano: EXCLUSIVE Michael Saylor Interview
https://www.youtube.com/watch?v=c3E91-RGjQE
Here, Saylor discusses how Microstrategy came to buy Bitcoin initially, the thought process at the time and how he looks at it one its one-year anniversary. 

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Transcript

Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Gabriel Riesco (00:02):
Welcome, everyone to one new episode of
the crypto noobs. Podcast. Ihope you're all doing great
today. Good morning, Alex. Howyou doing?

Alexandre Fuchs (00:11):
Good, how you doing?

Gabriel Riesco (00:13):
Good, good. So today we're going to focus again
on Bitcoin by on a very specificpart of Bitcoin, which is proof
of work, we're going to go overways relevant way you should
know about it, and why it's soimportant. Alex, go for it.

Alexandre Fuchs (00:32):
So I realized there's a big debate and a lot
of information out there aboutthe energy use of Bitcoin. And
particularly as it comes to ESGmandates and a number of other
concerns that some people havehad about Bitcoin, specifically
in proof of work. And in someways, also the transition that a

(00:53):
theorem is going to by movingfrom proof of work to proof of
stake, and I thought it'd beuseful to try to explain it,
probably not the mostaccurately, but certainly the
most simply to understand whyit's a core piece of what
Bitcoin is, and why it'simportant and why, in some ways,
it's a very elegant solution tothe problem at hand. And I

(01:15):
didn't see that being discusseda lot. And it came out of a
number of conversations I've hadwith a few friends, and I
thought I'd share it. So just tosimplify, let's try to
understand what we're trying toaccomplish. So in the existing
system and the existingfinancial system, and what do we
use every day, we're used tocentralized actors. And one of

(01:37):
the things that centralizedsystems do is that they allow
you to have a bunch of toolsaccessing, say, a database. And
without getting into all thetechnical pieces of it. Having a
centralized system allows you tohave a single piece of code
that's running. So software isrunning and doing stuff, and
saving, for example, youraccount balances and your

(01:57):
transactions and all that stuffto a database. That database
sits and protected with virtualmachine guns, making sure nobody
gets into words, hack proof, allthat kind of stuff. The onus is
on the centralized authority tomake sure that all these
transactions are valid, to beable to have access any
transaction and check it to beable to reverse transactions, if

(02:19):
there are problems, and all thatkind of stuff in there. For
again, this concept of trust isvery important. That's why the
Federal Reserve has its system,other banking institutions have
their own system and privateactors have their own systems
that you trust whenever you usea Bank of America credit card,
or JPMorgan Chase bank account,and so on, so forth. Now, in

(02:39):
order to create a decentralizedsystem, what you need as you
need to get to the same answer,or you get to you have to have
the same confidence in the factthat these transactions are
going to be processed properly.
But now in a completely opensystem, completely decentralized
where there are hundreds, youknow, dozens, hundreds, 1000s,

(03:00):
millions of actors, who were alldoing stuff in parallel in
completely different places andstill get to the same result,
which is where you are certainabout the ledger, a certain
amount of transactions, thatthose transactions that are
approved are correct. And that'sultimately you are building a

(03:21):
blockchain in this particularcase, but you're building a
record, which everybody cantrust and trust, again, being
the wrong word, but can getcomfortable, cannot be altered,
cannot be falsified, has verylow risk. Okay.

Gabriel Riesco (03:39):
Yeah. And to that point, I just want to add
something where I think it'salso genius. For me, it's kind
of like a perfect businessmodel, that decentralization in
the sense that miners are theones who are protecting the
system, or mining actuallyBitcoins. So those are the two
jobs that they do. They'regetting paid by the system by

(04:01):
designed. Yeah, so for me, as abusiness owner, I think that's
just, that's just great. Becauseit's not like someone that is
like a person paying them. It'slike the system was designed. So
the workers are kind of likeself rewarded by their job,
right. And that's, that's like abig innovation, but not everyone
understand about the session.
Let's go through all that. I'mgonna let you go. I just want to

(04:22):
make an offer, which I thinkit's genius. Let's work

Alexandre Fuchs (04:26):
through a couple of pieces, which are, in
my mind quite, quite interestingto think through. So everybody
knows that. The network uses alot of energy. There's a lot of
miners. So let's go through acouple of the basics one, this

Gabriel Riesco (04:42):
one on that poll. Yeah, sorry to interrupt
you too. But I think I got thestatistics, right. But I think
Bitcoin is 0.04% of all globalenergy consumption. So I think
that's a good data for people toknow because it's very
misunderstood. And there's allthese like, fuss about it. And

(05:04):
this is just data. This is notmy brain, I think people should
know. So it's 0.04% of globalenergy consumption just just on
Bitcoin. So that's not ahighlight.

Alexandre Fuchs (05:13):
Yeah, it's a fair point on the macro level,
it's not, you know, in South,Central, that's huge. But you
see a lot of comparison to smallcountries or to whatever it's,
again, the way that Bitcoin isorganized, it has basically,
you're joining a network, as wetalked about before you as a
piece of software you candownload. And with this piece of

(05:34):
software, you can have multipledifferent roles. So you install
this piece of software on apiece of hardware that you have,
wherever that piece of hardwareis, whatever capability to part
of that piece of hardware is,and again, Bitcoin through the
2017. Block size war, andthrough a lot of the things
that's maintained a very lightfootprints, what does that mean?

(05:56):
It means that the software canrun on a bunch of different
machines, it doesn't have to runin a data center, it doesn't
need a lot of memory, a lot ofdisk space, it can run fairly
easily. And this is why thereare many, many people who
actually run nodes or miners allaround the world, because it's
relatively easy to installcompared to other systems. And
the size of the overallblockchain, all of the

(06:18):
transactions accumulated sincethe Genesis block since the very
beginning only amounts, youknow, as of now, around 450
gigabytes, 450 gigabytes, if youwant to think about is half of
reasonably entry level, oneterabyte disk drive that you
would get if you walked intoBest Buy, or any kind of hobby
shop, to buy a machine. And sotherefore, the idea is that you

(06:40):
run this piece of software, andnow you have one of two roles.
One of them is to passively havea photocopy of the full ledger.
So you can run a node and as anode, you have a copy of all the
transactions since the beginningsitting there in millions of
homes and places all around,which again, gives a sense of

(07:01):
resilience to the network. Andthe way that the blockchain is
structured, the way to thinkabout it is that because all the
blocks in the history,everything in the past is meant
to be immutable, fixed, done. Nocontext, you're not going to go
into the database and changeanything, these blocks are

(07:21):
historical, they're now past,you can focus most of the
security on the block beingcreated now. So you don't have
to worry about your wholedatabase, because your whole
database is already kind ofgone. It's

Gabriel Riesco (07:33):
in the wild. And it's secured globally, by a lot
of people,

Alexandre Fuchs (07:37):
yeah, a lot of people have it. And for example,
you would have to go intomillions of people's houses that
change, you know, the livingrecord of the transaction, if
you wanted to steal a millionBitcoin put into your account,
you'd have to replicate thatchange, you know, in millions of
places. So instead of worryingabout being able to change the
database, which, for example, ina centralized system, you could

(08:00):
imagine that there's a lot ofefforts at securing the ability
to go in and to add $1,000 intoyour billion dollars into your
bank account. so on so forth,that's particular part of
changing the historical recordis very difficult to do in
Bitcoin, again, because of itsdecentralized distributed
nature, right. The second piece,which is therefore the focus of
the security, is all aboutmaking sure that the next block

(08:22):
every 10 minutes, is secured.
Right. So again, let's now thinkquickly about proof of stake
versus proof of work. Proof ofstake has been discussed as
being much more efficient andusing less energy, and so on, so
forth. But here, the logic andproof of stake says that, okay,
I'm going to stake somethingthat is valuable. Again, you

(08:46):
know, like 32, eath, and eath,2.0 network, I'm going to put
money and put value at risk sothat if I do something bad, it
is taken away from me, so I havesomething to lose, if I do
something bad. And if I lose it,then that's the cost, right. So
in that particular respect, whatyou tell yourself is that you

(09:09):
need, you know, many fewerplayers. But again, there's a
bunch of different things thathappened with that, including
the fact that you have to comeup with a lot of money in order
to be one of the people whoparticipate in validating the
transactions. And you aresubject to potentially some
attacks, if a very large playerwanted to go and spend a lot of
money to try to take over thethe network again, you know,

(09:31):
it's secure. But I'm not goingto say that it's not that it's a
that's a bad system at all.
That's not my point here. I wantto focus on a proof of work
piece. But the proof of stake bydefinition is going to be more
centralized, and also usually istied to systems that have much
higher throughput oftransactions, which structurally

(09:54):
anyhow, make the fact that theblockchain is so much larger,
and therefore probably is notappropriate for being run. In
the nodes in a distributedfashion, the way that you know
the history of Bitcoin fits onour hard drive. And we can get
into sharding into a number ofdifferent technologies, which
are used on a proof of stakesystem, or maybe using a future
in order to try to make it alittle bit more lightweight. But

(10:17):
leave it to be that the proof ofstake requires every actor who
is validating a transaction toessentially have a lot of
capital at risk. And that's theway that this system gets
enforced. Proof of Work is kindof is really elegant in the
following way.
I'm going to use a metaphor,because that's probably the way
that's going to be bestexplained. But the way to think

(10:39):
of proof of work is that you areinvited to play a game. And the
game has two components, thereare two things that you need to
do if you want to validate aBitcoin transaction. So what's
Bitcoin says and what thesoftware says it's like, anybody
can come and play that game. Anda game involves some rewards.
These are the rewards that youwere talking about before, which

(10:59):
is every block issues, newBitcoin that are given to the
people who validatestransactions. So again, this is
how the network gets secured,because there's a remuneration,
this compensation for the workthat you put into trying to help
validate network and again,validate that last block that
every 10 minute block to makesure that that block is correct.

(11:21):
So the idea is, is actuallyquite elegant, that's okay, come
and play this game, you have achance of winning. And let me
tell you what you have to do inorder to play the game. And the
game is for you to do twothings. The first thing is you
have to calculate correctly, allof the transactions in that
block, which is you have to lookat all the keys, you have to

(11:43):
look at all the transactions,you have to put them in the
right place. And you have towrite it perfect block, which is
a correct block. Right, we'llget to that later in case you
are trying to steal or you'retrying to, you know, hack the
system, what you would need todo, because obviously, you would
then be mining, you will then becreating a false block. But the

(12:04):
idea here is simply if you wantto play, anybody can play, the
first thing you need to do isyou need to calculate something
correctly. Right? That's a firstthing. The second thing that you
do is you play a game of chance.
And that game of chance is onewhere you get to get something,
let's just make it super simple.
You get something and I willtell you if you got it or not.

(12:26):
Right? Which sounds insane,right? That sounds like what are
you talking about? Like, why doI have to do this amount of work
here the correct work ofanalyzing all the transactions,
that's A and then B play thiscomplete game of chance, which
is like a roulette or, you know,or throwing a dice. I mean,
exactly the way to think aboutmaybe as a metaphor is I'm
rolling a dice, and how big andhow many facets the DICE has is

(12:52):
where we're going to discussnext. So what happens is in the
very beginning of Bitcoin, notvery many people wanted to mine.
This is statistical, which isfascinating, which is one of the
most popular probably mostadvanced miners out there, the
bitmain, which is Chinesecompany, which is one of the
large companies that makesminers bitmain ant miners s 19
Pro, which is kind of the onethat currently is one of the

(13:16):
better ones, they just announceda new one. But let's just say
that's where the market is. Now,one of these machines represents
the network network computingpower that existed in the whole
system of Bitcoin in 2013. Sofrom 2010 to 2013, there's not a
lot of people doing a lot ofmining, right. So at that
particular point, it was exactlythe same game, it was just that

(13:36):
there are fewer people showingup and saying I want these
rewards, I want to play thegame. And these people at the
time, there are fewer of themwhat they would do and remember
the rewards half every fouryears. We'll get into that
later. But basically, at a timewhen they would do is that they
would have a dice that maybe had200,000 faces, right? So we all

(13:59):
know is six face dice. That'sthe usual DICE DICE that you
roll. But the way to think aboutit is that you're taking game of
chance and there were maybe500,000 faces that I died we got
one chance and some maps right

Gabriel Riesco (14:11):
the big days.
Yeah, that's

Alexandre Fuchs (14:12):
exactly what I'm trying to metaphor can only
go so far. But the idea is thatyou take a completely random
chance and if it's true if youroll the rights you know if you
guess the right thing, and thenetwork tells you hey, you are
the winner lottery completeexactly like buying you know,
whatever the lottery is. You winthe reward, and you're like, oh,

(14:33):
wow, everybody else doesn't geta reward. What happens?
Everybody competed. Everybodydid this thing. This is the
reason why pools exist. So whatthe pools do is they say, Okay,
if anybody in my pool wins thereward by guessing correctly
then everybody splits it that'show they handle it. That's why
there are few pools and youmeant you know, you've just been
in the pool the pool, earns afee. And then the idea is that

(14:55):
now when you go mine, you'dnever mind by yourself because
your chance of mining byyourself is essentially, you
know, close to zero. But you getjust a part of a pool. And
again, as part of a pool, youhave a good chance of earning
rewards. Now, what's magicalabout this is that to deliver
difficulty, or the number offaces on the dice, that you're

(15:16):
rolling, the chances that youhave the odds of the lottery,
whatever you want to call it,right? increases the odds. So I
should say that your chancedecreases and the number of the
your chance decreases as morepeople want to mine. Right? So
again, to the example that I hadbefore, maybe there was 100,000

(15:40):
sided dice when you were rollingit in 2013. And by now the dice
the DICE has, you know, 100million size or 500 million size
or whatever the number is,right? It has way, way, way less
chance for you to win, becausethere's way more people playing,
right. And this is where theenergy usage comes in. Because
the whole idea is that as theprice of Bitcoin goes up, then

(16:04):
you have more and more reason totry to, in some way participate
in a pool in order to try to getsome of the rewards is why
mining has been quite profitablethe last 18 months, as you've
seen BTC go up, you know, 1020times, right? But what's magical
about this, is that okay, so allso the system basically picks at
random, someone says you win thereward, I'm going to take your

(16:26):
computer that block, and I'mgoing to put that block in the
blockchain. So it picks atrandom, right? It cannot pick it
cannot find somebody who is ahacker, right, that hacker
doesn't have a place to go to besure that he's going to get this
thing, the only way a hackerwould be able. So let's say for
example, you wanted to breakthis and you wanted to add

(16:47):
yourself a million dollarmillion Bitcoin to your account,
right? Just how would you do it?
Well, you would have to be partof a pool. Or you would be
basically have to be picked atrandom amongst billions of
possibilities, right? To be theperson whose block would be
taken in order to get your falseblock added to the blockchain.

(17:08):
And in order to do that,basically, this is what they
call 51% attacks or any of theother things that you heard, but
it's even more complicated 51%.
Because basically, if you wantto be sure that your block is
going to get picked, which isagain picked at random, you now
have to be just an overwhelmingpart of a network. So in some

(17:30):
ways, the energy which is beingspent in all these miners and
all this efforts, it soundsinsane, but it is protecting the
network, because it's making itessentially practically
impossible for hackers to comein, to provide a false block
along with its guess, and bepicked by the network as the one
block the randomness, thelottery system makes it possible

(17:55):
that, well, it's going to hit inthe most logic in the most
logically adopted solution tothe block, which is the one that
most people are going to justaccept, right and compute which
is kind of elegant in some ways.
Because what it does is it saysLike if somebody you know in
whatever specter right, like theevil agency of dreams, Vaughn or

(18:19):
whatever, decided, you mustbreak Bitcoin, I'm giving you
the job to bring Bitcoin. Nowyou have probabilities, which
are all screwed up, like, thatperson cannot assure that they
can break into it in anypossible way. Because the
probability that you know, ifthere's 150, eggs, a hash of
mining power now more or less101 60, whatever it is, you'd

(18:41):
have to secretly deploy thatamount, and then more, right? In
one attack, you know, at oneparticular point, and even if
you've just deployed, let's say,170, or in 60x, a hash when
there is 160x 100 capacity, now,you still only have a 5050

(19:01):
chance of being able to break itin order to assure you 90%,
you'd have to have like ninetimes or you know, whatever the
number is, right? The lotterysystem actually ensures in some
way, some fair or some dynamicsof game theory that makes it
really difficult for you,particularly as the network
grows in size, and more peopleare mining. And so what's what's
kind of magical about it is thatthey, in some ways in the

(19:25):
construction, they knew that themore people would mined and the
more there would be value in theBitcoin, the more it would
attract miners, which would mustsecure the systems more, but at
the same time, they put in thesystem where the rewards go down
by half every four years, whichbasically means that you have

(19:46):
some four sides, you have theability to reduce the energy
consumption in a verypredictable way while not
hurting the security that muchthat much because everybody can
predict the rewards are going togo down and therefore the public
suitability of mining is goingto come down in some ways, as
the price happens as the pricemoves. Right now we're in a very
special period where the pricehas exploded, and therefore

(20:07):
mining is incredibly profitablecompared to where it was before,
right. So why you see, you know,the interest in mining and some
sort. But what's fascinating isit over time you have a
predictable drawdown, yourprincipal reduction in the
rewards, which itself,irrespective of what the the
bitcoin price will do, willreduce the amount of energies

(20:28):
that the system will use.
Because remember, the amount ofwork that's necessary to
calculate correctly, the nextblock is a billionth million
billions of the amount of workthat's being done out there in
terms of cryptography and work,it's a very, very small amount,

(20:50):
every one of these people isdoing it independently, it's a
very small amount of the overallwork being done. So you can
reduce the energy over time in apredictable way, while still
securing the network and makingsure that every moment, there's
enough people competing so thatan actor can really come in and
take over all the miners,there's no incentive for the
miners to go away, they don'thave any incentives to rent

(21:11):
their miners to some bad actor,if a bad actor comes and starts
providing false proofs. Sinceeverybody can see everything,
you can see that the false blockis being advertised. If you see
a lot of people with the samefalse block, you can start
seeing that there's an attack,there's a number of ways in
which the system is actuallyreally elegant and protecting
itself. This long kind of exposeis to say that, what's what's

(21:37):
kind of interesting about thisis that yes, it uses a lot of
energy. Now, however, the energyis is required in order to lock
in and secure the amount ofvalue that's in Bitcoin. So in
the very short term, energygrows, if the value in Bitcoin
grows, which means that it's avaluable use of the energy,

(21:59):
because if value is very low,there'll be less energy being
used, there's a relationshipdirect between the amount of
energy being used, and theamount of value that's in the
network, which is a very helpfulthing. And number two, yes, over
time, that energy goes down,because the system and the
protocol is written in a waythat yeah, if energy feels like
it's high at a time whereBitcoin explodes in value,

(22:22):
because of course, in the shortterm, people can throw a lot of
a lot of resources to try tomine it. Over time, the energy
and the security needs, sorry,to giving you say the same, but
the energy used to secure thenetwork goes down, because the
rewards go down.
And the importance of that isthat it is a system that is

(22:47):
self, if self reinforcing, orself healing, it is establishing
itself. And as it grows intovalue, it uses more energy, in
order to make sure it's secure,which is one of the purposes of
the Bitcoin network of the proofof work network. But also which
is magical is that it also knowsthat it needs to reduce its
energy over time, the energydevoted to the mining and to the

(23:09):
securing of network, such thatover time that energy is
handled, if for example, thelevel of rewards have been the
same throughout the life of theinstruments, you know, again,
remember the house every fouryears, and then 2140. If it'd be
the same, then actually thebudget of an energy would have

(23:30):
gone higher and higher andhigher and stayed high. But
actually, the reduction in therewards ensures that even if
energy feels like it's high now,a couple years from now, it'll
be less and it'll be less, andit'll be less, even if this if
we don't lose anything insecurity. Does that make sense?

Gabriel Riesco (23:47):
Yes, the question I have there is, if the
rewards go down on the mind, themining and the miners get
rewarded less than they'vecompensated, we would tend to
think that there will be lessminers involved, because there's
less incentives. So how, howdoes that work?

Alexandre Fuchs (24:06):
So the importance is an attack or an
attack is kinetic, an attack isin short term. So a block gets
mined every 10 minutes. Andlet's just assume that we've had
correct blocks, and these blockskeep on getting printed every 10
minutes. In order for an actorto come in. Compared to a
centralized system, first, youknow about it right away. And

(24:31):
you have to deploy a, you haveto, let's say, let's talk about
a 51% attack, which is thesimplest but which is also the
one that doesn't, that gives you51% chance of hacking, right?
You'd have to deploy twice theenergy that was there the block
before, not a year before, notsix months before, not 10 years

(24:52):
before, but 10 minutes beforeyou have to somehow be able to
overwhelm and network in thatinstance. That's the security
attack vector. That's the that'sthe that's the, that's what the
protocol forces you to do as anattacker. Compare that, for
example, to finding a backdoorinto a centralized system, where

(25:15):
you could be in that system formonths and years looking around,
before you actually act, right,in this case has nothing to
break into. There's no secretsystem, no access to a database,
no, nothing that you you know,there's no Mission Impossible
going into some data center totry to put something in
something not at all. In thisparticular it's a lottery
system, because it's open, itforces you as an attack vector,

(25:39):
because again, the blockchain ishistorical, you can go and
change that and 10 millionpeople's homes and and in each
of the nodes, you can't changethat. So you've got to change
the block. And the only way tochange the block is at a
particular block, you can'tstart changing in three blocks
before we're slowly get in No,there is a block where you have
to put in your effort. And theonly way to put in your effort

(26:01):
when you have so much existinghashing power has to be kinetic,
it has to basically go from oneto two, just to get 50% chance
or 123. If you want 66% chance,or one to four, if you want to
have 75% chances of being ableto hack in 10 minutes. So you

(26:21):
have to have an overwhelmingattack. So what happens is that
right now you have 100. To yourpoint, right now you have 160x a
hash of power, right? Two thingshappen. The first thing is that
every year, the hash rates, thethe ability of machines to make
more computation for less energygoes up. Right, which is

(26:44):
beneficial on both sides, itcould be benefits to attacker
benefits into defender,whichever it is, right. But what
happens is that

Gabriel Riesco (26:51):
you

Alexandre Fuchs (26:53):
even if, say four years from now you had 75x
A hash, right? Let's say thatlike half of the hashing, power
disappears, because you know,the rewards are not as good and
therefore everything stayed thesame, and the pricing and so on
so forth. At every point intime, you need to double, triple
or quadruple whatever isinstalled in that moment, within
10 minutes. And at a certainlevel, it becomes impossible we

(27:18):
pass this level long ago, it'simpossible to just deploy such
kinetic force into the systemwithout people knowing about it,
you'd have to control supplychains, you'd have to, you know,
if if, for example, if campusmining is having a lot of

(27:39):
complaints, because servers thatwere promised the customers are
arriving late, and there'ssupply chain problems, and mag
and semiconductor problems atTSMC, and supply chain issues,
and so on so forth. How is a badactor going to overwhelm the
system to try to get much moreof the system? Now, you can

(27:59):
always think that a governmentor somebody can try, you know,
that's right, you know, thatChina in some ways, is secretly
building an army of things totry to do that. But isn't that a
realistic case? Right? A realestate case is a hacker trying
to find a way to get into asystem elegantly by finding some
flaw in the code or something.
Not really this kind ofimmediate public brute force,

(28:23):
every when there's an attack, ifit attacks, everybody's gonna
see it, you're just gonna seethe overwhelming hash rate
explode in a matter of minutes.
It it's a very public attack,it's a very visible attack, it
cannot be really hidden all thatwell. I don't know if that

(28:43):
helps.

Gabriel Riesco (28:44):
No, it does help. Now, the question was,
that I was asking is, it seemslike over time, from what you're
saying that less Miners aregoing to get involved? Since
there's going to be lessincentives? Am I getting that
wrong?

Alexandre Fuchs (29:00):
It all depends on where the pricing is. And all
depends. I mean, two things, Ithink on that one, the first
thing is, again, the level ofcomputing power that you need in
order to calculate correctly thenext block is not very big. So
we do not I don't think riskever getting to the point which

(29:22):
exists in other blockchains bythe way, where the participation
of the net of the miners is solow that you're just not getting
enough stuff calculated. So youknow, the blockchain dies,
basically, this is where thedifficulty comes in. Right? This
is the number of faces on theday, you know, you could change

(29:43):
it back to one out of six andhave a normal day and you'd
still have some securityprobably not very good. You get
my point. So you can reduce thedifficulties mean by a factor of
a million and you'd still havepretty good security because of
the lottery system is truly thelottery system. And right now is
So, you know, think of a, what achance of gaining the tri state

(30:06):
lottery five times in a row,right? We had these level of
odds. The second thing is priceof Bitcoin, you know, again,
we're back to, it goes back tozero and all this is a waste of
time, of course. But if itcontinues to grow or stabilize,

(30:26):
then it becomes a profitablebusiness to mine at pretty much
any basis, right? Some peoplewill magnet, there will be out
there mining it with for somekind of compensation, even if
the compensation goes down.
They're still profitable. Insome ways. It's super profitable
now.

Gabriel Riesco (30:45):
Yeah, it seems that if there's, the price goes
down, and there's lessincentive, there's probably
going to be less miners still,we kind of adjust itself in a
way, and when the price goes up,then there's going to be more
incentive. So miners are gonnakeep trying to get that reward
as it goes up. So in that sense,it seems like a very flexible,

(31:10):
adjustable system by default.
And I

Alexandre Fuchs (31:14):
know it addresses up I mean, the other
way to think about it

Gabriel Riesco (31:16):
from another difficulty level, so adjust
itself in

Alexandre Fuchs (31:20):
Justin has been addressing quite high again,
because in the short run, theprice is going up so much that
there's an enormous amount ofdemand for playing the game or
supply of mining capacity,depending how you want to think
about it. Let's not forget thatit costs you. It does put some
numbers just for fun. We wentthrough this last week. But

(31:41):
riots and Mara and all the bigminers were buying these miners
for about three or $4,000, earlylast year, middle last year,
which is probably around theproduction costs, I'm guessing,
if you go to buy them now on thespot market, they're anywhere
between 9015 $1,000. So they'reexpensive. Because there's a

(32:05):
premium now to try to get yourhands on it, the cost of them to
build my senses has not gone upby that much. Certainly. So
you're talking about like, youknow, machines that cost. And
again, let some people mightknow their coins with graphics
cards and some jewelry, whichare in the 1000s of dollars, but

(32:25):
you're talking about 1000 to5000, maybe $10,000 investments,
but probably the cost of theproduction when everything
stabilizes and gets back tonormal, it's probably, you know,
let's say $5,000, right? That'sattainable. That's a
decentralized system, anybodycan really start mining and you
know, you know, if that pricegoes down, or if it continues

(32:46):
to, it's a reasonably you know,again, we're not compared to the
amount of effort that you haveto do to participate in a
centralized network, or you haveto build all this stuff. Now
we're talking about everyonebringing to the network, small
pieces that interact and buildstrength in the network. So
again, these are network effectson the mining side, just as much

(33:06):
as there is on the value side,we're getting a little bit off
topic. But the point I wanted totry to make to try to summarize
the proof of work base is thatit was designed to use energy,
it was designed to use energy ina scalable fashion, which means
as as Bitcoin became moreimportant, it would use more
energy. But at the same time, itwas built in a way where if you

(33:28):
try to attack it, the energyneeds are very difficult to
access. It's not just money thatyou need, you need energy and
energy is more difficult thanmoney to find in that particular
respect. Because you have toactually have machines doing
things haven't been, you know,invested in them hooked up by
just being in network, and soon, so forth, that were not
there 10 minutes ago, in thatcontext. And also structurally,

(33:50):
that demand of energy or thatneed for energy goes down every
four years with the rewards. Soit's an elegant way of, again,
trying to accomplish if you goback to the very beginning, we
are trying to find adecentralized system that comes
up with an accurate answerverifiable with some game theory

(34:10):
and some game mechanics thatensure that bad actors can't
come in and screw things easily.
And it's using network effectsto say, Okay, how much energy do
I need to secure that? Findsomething which is expensive for
people to use hard for people todeploy, but also that, you know,
reduce over time, once it'sfigured out what level it needs.

(34:33):
Nobody could predict it. Thepoint being, again, is that if
you sit there and you try tobuild a centralized system, you
sit there and you go and youthink about for a year or five
years or however long it's goingto take the central banks to
figure out CBDCs to try tofigure out their software
requirements and there's anotherknock and stuff fantastic.
Congratulations. This isbasically saying here's a piece

(34:53):
of code. The market willdetermine the amount of security
needs the market will determinethe The amount of energy that he
needs, and I'm putting someincentives so that it's the
energy is required in any regardfor an attack is is really
difficult to, to examine due tothe muster at scale. And it's

(35:14):
going to go down over time. Soin terms of ESG, concerns, in
terms of the environmentalconcerns, the the the, I think
it's easy to get to theconclusion that the value of
peer to peer store of valuefundamental layer,

(35:36):
digital currencies, needed someenergy to secure. And this is
one of the more direct ways themore auditable, and more
predictable, if not predictable,the more network use adapted,
you know, the one that has themost relationship to its value

(35:58):
that you could find that youcould find, or at least an
elegant solution to it, ratherthan, for example, building
massive things without reallyknowing where your capacity or
your value is going to be. Tothat point, whatever people are
going to spend on CBDCs, for theUS dollar, or for the, you know,
the any of the other currencies,they don't know whether it's

(36:20):
gonna be successful or not.
There's an enormous amount ofeffort that's out there to try
and go in and do things. This isnot illegal in a way that
basically says, you know, we'regoing to use energy. Yeah, the
energy is going to go up as thevalue in the network goes up.
And it'll go down structurallyover time without hurting
security. It's a smart, it's asmart piece of code

Gabriel Riesco (36:36):
was also designed to be decentralized. So
if you want to centralize it, soit seems like it wasn't built
for that, right. Anyways, Ithink that was a very
interesting one. Thank you,Alex. I hope you enjoyed that
one. And we'll see you andyou'll hear about us in the next

(36:56):
podcast. Thanks,

Alexandre Fuchs (36:58):
that hope that was

Gabriel Riesco (36:59):
helpful. Have a great day, guys. Bye.
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