[00:02:47] Adam Back: And here we are with, you know, more power in a cell phone than the world supercomputers years ago or something. Right? And so it goes, and it does, you know, people keep thinking, oh, it’s the end, you know, they reached a physical limit, but they just keep going. Right? So, and it’s, it’s down to, you know, iterative innovation, right?

[00:03:06] Adam Back: And so, of course, that applies to mining machines and they’re using. Standard technology, right? It’s integrated circuit technology, which has, you know, hundreds of billions of dollars worth of R&D over the last decades, and even an individual fab, like a, a foundry that manufactures ASICs or one of the ASIC companies.

[00:03:28] Adam Back: Of which there are, you know, four or five globally that can manufacture at the cutting edge. You know, that just a plant to build them costs 10 billion maybe, or something like that. There, there’s some, and they’re international companies. You know, Samsung and TSMC are starting to break ground in the US even, and, you know, they’re operating in different countries around the world.

[00:03:47] Adam Back: So the, the types of chips they make on those are, you know, CPUs, cell phone CPUs, graphics, GPUs, memories, all this kind of thing, right? And so, but you can make custom hardware and you can see the hint between a CPU, which is, you know, the, it’s a general purpose computing device and a GPU, which is a specialized graphics processing device.

[00:04:12] Adam Back: It’s the GP rate graphics processing and it’s been, you know, specialized and hyper optimized for graphics, but it’s not so good for general computing, right? It takes which cuts corners. It does the same thing repetitively. And so the Bitcoin ASIC is kind of like that, but taken to the extreme, which is, you know, it does one thing and it only one thing extremely efficiently, and it’s a kind of SIMD machine, which means it’s doing a single instruction on multiple data.

[00:04:38] Adam Back: So it’s doing the same thing lots and lots of times. Whereas a CPU and to some extent, GPUs are, you know, following different instructions or different software on different calls. Bitcoin is kind of hardwired activity. You, you shall calculate this hash on this nonsense and do it very fast, right? So that’s what’s going on in there.

[00:04:57] Adam Back: But you know, the whole thing is super optimized in terms of, you know, CPU is obviously very optimized because, you know, cell phone and. Laptop manufacturers care about, you know, the battery life and the performance and efficiency and all this kind of thing. And so, but the bitcoin, ASICs are also extremely optimized, even down to custom units.

[00:05:21] Adam Back: So customized nodes. So at the, the lowest level of a chip, you know, you, you can sort of compile a circuit, right? So you can describe the digital logic. And then there’s some software that can lay out for you and use standard library cells, you know, for like an old gate or something, or an adder or a shifter.

[00:05:38] Adam Back: So they’re sort of building blocks and libraries that you license. And if you really need an extra bit of efficiency, you make custom ones, like you cut corners, you know, something specific about the way it’s used. It’s used. And so there’s all these custom optimizations and hand tuned layout. And so, you know, to get that last bit of efficiency, and that’s where things are these days.

[00:05:56] Adam Back: The, the custom stuff is in there as well.

[00:05:58] Preston Pysh: James, anything to add on that particular topic in general?

[00:06:03] James Macedonio: No, I, I, I think, you know, Adam said it pretty well that if you can optimize these chips to do the very specific function like Bitcoin mining, then you’re, you know, you’re ahead of the game, right? And, and that’s what we’re looking to achieve to do, right?

[00:06:15] James Macedonio: We’re, you know, putting our own little special sauce that being able to, you know, to do our own, building out our own ASIC miner, you know, we’re able to tweak it exactly the way we want in many different ways.

[00:06:25] Preston Pysh: One of the things that Saylor mentions this from time to time and he says that Bitcoin is backed by not just energy, but encrypted energy.

[00:06:35] Preston Pysh: When you look at what Adam was just describing in a lot of detail of how custom and specialized it is, I think it’s lost on a lot of people that aren’t intimately familiar with this space, that that is additional security in Bitcoin because you just can’t go to an Amazon server farm of their, you know, all the, this processing that they’re doing and say, alright, start mining Bitcoin and think that they’re going to be competitive against these rigs that are highly tuned and specialized for guessing the NAS that Adam’s talking about.

[00:07:06] Preston Pysh: And I think that’s a really important thing when we talk about security and what. Backs actually Bitcoin, anything when I’m thinking about this from a manufacturing standpoint, I mean, this is a major overtaking that you guys are doing. And to do it, not just to build it once, but then to build it at scale and then get the timing right, seems to be very hard or very difficult to do, especially for somebody that’s entering the market for the first time.

[00:07:32] Preston Pysh: What are some of your thoughts on that? Is that correct in thinking or is there, is it maybe easier than what you’re describing?

[00:07:39] Adam Back: It’s spot on. And in fact, most people without prior experience, or even with ASIC experience, but not specialized to Bitcoin mining, who enter the space naively thinking that they can, you know, they can make a, a Bitcoin ASIC and a minor, how hard can it be actually end up failing due to technical failure?

[00:07:56] Adam Back: Because it’s extremely high risk. But what we did is we went and well bought some specialists in, right? So the DUIs team, a company that’s been. With a team of experts have been manufacturing Bitcoin, ASICs since 2013, 2014 with multiple previous generations. And they’ve done, you know, everything from the ASIC design panel, supply control boards, chassis, airflow, and they, they do the, you know, the R&D of course, you have to work with specialized companies for different parts of that process, like design process.

[00:08:26] Adam Back: And finally, the mass manufacturing by everybody effectively, is done by large, specialized electronics manufacturings, companies that, you know, will manufacture Toshiba laptops or whatever you want, basically, right? You contract with them. These are public companies that have like 150,000 employees and can, you know, manufacture to the same tolerances and like three or four different countries in the world.

[00:08:51] Adam Back: Like ship it to you from, you know, so you can say, well I want it to be manufactured. You know, could you do it in Mexico? Could you do it in Thailand? Could you do it? And you know, they’ve got different sites where they can do it and reach the same specifications. And so they take care of the bulk of the sort of generic supply chain and the assembly machines and the kind of mass production, manufacturing and QA process, you know, so we’re more involved in the earlier stage.

[00:09:14] James Macedonio: And on top of that is the timing you brought up, which is very critical. You look at the, the ASIC market now, it’s there’s an overabundance of supply. Which are driving the prices and keeping the prices low. So anyone looking to enter the market now for the first time, there are ASICs in the market that are selling below manufacture costs probably wouldn’t be a smart thing to do.

[00:09:36] James Macedonio: And going back to the comment about Microsoft and Google and Amazon, right? Yeah. It is more than just a chip. They’re billing highly redundant data centers, and they’re not really specialized for one purpose. So from Bitcoin mining perspective, especially, you know, Blockstream has a huge amount of experience.

[00:09:51] James Macedonio: We’re out there looking for the cheapest energy we can find, and we build modular data centers, which are more efficient than what what you’re finding in somebody’s larger enterprise cloud providers.

[00:10:02] Preston Pysh: So we’re, we’re going to come out cheaper. I, I would think that the reliability would be really hard in testing to fully understand what the actual reliability will be long-term, because the things already running at peak power at all times.

[00:10:19] Preston Pysh: But to really kind of understand the reliability, you got to get three years into the future of that thing running constantly. So like, how can you emulate or simulate what that reliability might look like three to five years after it’s been manufactured and sold. When there’s no way to kind of really accelerate, I, that’s the word I’m looking for, to accelerate the use of the rig.

[00:10:40] Preston Pysh: How do you guys think through that from like a testing standpoint?

[00:10:43] Adam Back: Well, yeah, I mean I think the, you know, one thing that helps is this team has built multiple before. And, you know, learned things along the way. And so I think there’s really no substitute to. Learning by experience with manufacturing Bitcoin, ASICs, even for somebody who’s made less, you know, high performance, high duty cycle, high power drain ASICs.

[00:11:05] Adam Back: And I think there are specific areas where it’s not, not my area of specialization. So you need a saff on, on the line really. But you know, from talking with them over the last year or so I’ve seen that there are kind of premature aging strategies people will use. So they’ll intentionally overheat something per tructure period.

[00:11:22] Adam Back: And that would sort of simulate aging and things like that. So that there are things you can do, but ultimately, yeah, you have to work with tolerances and. All these design tools for SLT layouts and things are all working with tolerances and robustness estimates from the parts up to the completed system as well.

[00:11:41] Preston Pysh: It seems like everything’s going to immersion and liquid cooled is that kind of how you see the next five to 10 years playing out for any new rigs that are coming onto the market as that they have some type of liquid cooled or immersion capability.

[00:11:55] Adam Back: We’ve, we’ve designed from the ground up to be able to support both with minimal extra skews like compo, major component parts, right?

[00:12:04] Adam Back: I think some of the other manufacturers have been sort of aftermarket immersion, so they weren’t really designed for it though. They, they will work if, you know, you adapt them, right? So I think by designing for, from first principles for that, we can make it the right dimensions to efficiently cool. Use immersion, for example, because the amount, the oil, the, the cooling oil is expensive, right?

[00:12:27] Adam Back: So you want to, you want to have an efficient dimension to be able to pack them in. We also, you know, so we’ve also looked at the. Liquid cooling, which is the water blocks, and there are some advantages to that, so pros and cons, but we, we’ve also been doing airflow with, you know, some success. So, you know, even in relatively hot cr climates in Texas, for example.

[00:12:48] Adam Back: So we, we can support both. Yeah.

[00:12:51] Preston Pysh: I’m curious where you think it might come in from like a, a price per terahash standpoint is, is that known at this point, or are you still too far in the left of the developmental timeline to know where that might shake out? And I know it’s highly dependent on the price of other rigs and the price of Bitcoin and all that kind of stuff, but is there something that you’re targeting?

[00:13:10] Adam Back: Right. I mean, I mean, I could just give some kind of vague observations of, of the general market because none of the manufacturers are really disclosing what the build cost is, but we’re sort of inferring, you know, from how, how low they seem willing to sell them for and things like that. Right. So, you know, we’re seeing things sell for under $15 a terahash.

[00:13:29] Adam Back: It is all priced in, in like puts her hash price in. Yeah. Yeah. And. We think that’s below manufacturing. Maybe manufacturing is around 20 or something. 20 to 25. You know, some, some manufacturers might have a different manufacturing cost or maybe, you know, different generations might cost a little more if they’re on a more advanced process node.

[00:13:47] Adam Back: And one difference for our miner is it has more reasonable parts because it’s a 14 new blade server that fits in standard data center rack. In a, so it’s effectively a two foot cube with 10 blade servers that slide into it. And those are like field swappable. So it’s, you can, you know, potentially upgrade a blade, which is a 10th of the things hash rate.

[00:14:11] Adam Back: And it’s a kinda one pair hash in a two foot cube. So usually people are selling miners, you know, 90, a hundred, 110 terahash in a kinda shoebox size. But this is a data center rack size with blades. And so you can fit three of those in a full size data center rack.

[00:14:27] Preston Pysh: Is that part of the strategy maybe moving forward as far as making the blades interoperable for upgrades in the future?

[00:14:33] Preston Pysh: Or would you get a whole new box?

[00:14:34] Adam Back: Yeah.

[00:14:35] Preston Pysh: Oh, wow.

[00:14:35] Adam Back: Now, as part of the, part of the thought, it’s less e-waste, less cost. We have a shared control board across 10 blades, whereas today, people have a separate control board for each shoebox, and a shoebox is roughly equal to a blade. And then we can also, you know, upgrade blades with, you know, a one point 0.5 versions.

[00:14:54] Adam Back: Right? So like in between versions, like extra optimizations on the current generation or new generation, even in the same blade and reuse, you know, the pass supply and the control plane.

[00:15:05] Preston Pysh: So this is a dangerous question and you don’t have to answer it if you don’t want to. When can the public market start getting their hands on these things Into next year?

[00:15:15] Adam Back: So, you know, we’ve been taking the time to focus on more optimizations, because as James indicated, the basic market is depressed right now. So normally, well, let’s say in 2021, no mining machine manufacturer had inventory because nobody’s well enough capitalized to do that. And so what they do is they ask the customer to prepay and even to manufacture the ASIC itself, the foundry manufacturing process takes like four or five months, right?

[00:15:45] Adam Back: So you are looking at, at least six months before you get your first machine. In 2021, the market got so like overheated that people were thought, you know, tripping over each other to buy miners. They pushed the price up, they’re flying over the same supply chain, and there were supply chain limitations too, right?

[00:16:00] Adam Back: So it went from, you know, six months and you might get the first batch to, you know, nine months, 12 months, and your big order will get delivered in 12 parts over the next 12 months after that. So, you know, you, you start making a payment plan and you might not get the final loaner until two years later.

[00:16:17] Adam Back: And so that, you know, we’re still seeing, seeing the tail end of that. You know, people were really piling in buying miners in the early first half of 2021. And, you know, those are still in box on pilot or tail end, possibly still arriving. But it does mean that at the moment there is inventory, which is not typical.

[00:16:37] Adam Back: And so you could actually pay money and get machines within the space of a week. Right. Normally you’d be looking at six months.

[00:16:43] Preston Pysh: Wow. That’s changed a lot since what, a year ago? Two years ago? Yeah.

[00:16:48] Adam Back: I mean it’s, it’s down to the cycles. So I would say, you know, most of the people with those machines would really like to put them online, but there’s a shortage of hosting capacity.

[00:17:00] Adam Back: So places with. You know, transform it up, power at two 50 volts, cooling racks, ethernet, et cetera. Right. It, it has an infrastructure cost to build that kind of thing. And that’s something that we’ve, you know, built quite a bit of. And you can see the hash rate has come up this year. You know, about what say maybe 50% up from the beginning of the year.

[00:17:21] Adam Back: And so clearly, you know, quite a bit for infrastructure has been built, but not enough. And so there is, you know, until the infrastructure capacity to plug them in catches up there’s a surplus. And so, you know, people are not going to, so it’s a kind of bias market. So they’re, they’re going to negotiate a lower price.

[00:17:38] Adam Back: And we think that once that inventory is absorbed, which it, you know, will be sooner or later, then you know, the prices will start to normalize. ’cause it depends on the market price of Bitcoin and the profitability of mining and so on. But, you know, the profitability of mining has also improved. I mean, the revenue per terra hash has gone up because the prices increased faster than the hash rate and.

[00:17:59] Adam Back: Because it’s a, you know, the mining activity is dominated by the energy costs and the operating costs. If your revenue goes up 20, 30%, your profitability probably goes up a lot more because a big part of that was electrical cost, right? So you might be double or triple your profitability and, you know, people won’t persist in it, un profitable.

[00:18:18] Adam Back: So, and if they can’t make money on electrical terms on like very old generation equipment, or because they have high cost of power or high finance charges, they will stop. And so, you know, you, you know that everybody is kinda plus or minus making a profit. It’s just there’s a lot of sunk cost activity going on because of this. Kind of supply till that’s used up.

[00:18:37] Preston Pysh: I know you threw the, the number $15 per terahash. But I think that it’s a really important consideration for people that hear a number like that. A lot of the times, the rigs that have been employed for, call it three years, are running at a price that’s $15 per terahash.

[00:18:53] Preston Pysh: And you’re going to run out on the reliability in a year or two, and you might pay up a higher, you might pay a higher price for something that’s maybe mining at $20 per terahash. And that is, it is built into the fact that you still have the entire life of that miner to employ. So the, the numbers on this stuff, it is very complex.

[00:19:13] Preston Pysh: There’s a lot of moving parts. I couldn’t even imagine trying to manufacture these at scale and get it out the door, like, what an undertaker. But you know what, if you’re in finance and you’re an engineer, you’re a pig and mud, right? Adam? Like yeah, you couldn’t get more pig in mud than this.

[00:19:29] Adam Back: Yeah. It’s definitely a fascinating area. I mean, you’ve seen other, like in previous, you know, because we’ve all kind of sat through and watched one or two market cycles, you see that in those bull market periods, the profitability of mining gets so ridiculously high. The people will buy anything that mines and they’ll buy, you know, they’ll turn old miners back on.

[00:19:51] Adam Back: And there was even a period where one of the major manufacturers couldn’t get enough foundry capacity at, at the cutting edge process node at the time. So they went, you know, to their other fab and said, well, could you make the previous generation, ’cause people will buy those two right now. You know, so people stop caring that much about efficiency.

[00:20:08] Adam Back: They just want to get them online when there’s a, you know, a ball run and the profitability’s very high. So yeah, I mean, that feeds into the basic fund, but that, that’s the sort of dynamic. So it’s, it’s basically swinging. Across market cycles between a shortage of basics and then a shortage of hosting power in a, in a, when people have overshot.

[00:20:29] Preston Pysh: I just get really excited when I think through how difficult a lot of this is in order to stand up the production and the deployment and the infrastructure once the rigs arrive, and making sure you have the right transformers and like all of this stuff. For me is protecting Bitcoin. If there is a nation state that’s going to try to attack this, good luck like bringing all of this online and securing enough hash rate to have any type of, everyone talks about the 51% attack as being the attack vector on Bitcoin.

[00:21:01] Preston Pysh: It’s like you really don’t understand how complex the mining process processes. If you think that that’s something that’s easily done. Adam and James, you weren’t here on the last conversation that Adam and I had with the Blockstream mining note, which this was probably like in the 2021 timeframe, I would guess we had this conversation, right?

[00:21:18] Preston Pysh: But I understand that Blockstream is doing a basic, you guys are always so good with your naming conventions. The basic, which stands for Blockstream ASIC note, and you guys are listening this over in the, in the eu, this is a bond or a, a note ’cause it’s short duration. Explain why you covered this when we talked about it years ago, but for people that maybe didn’t hear that conversation and James or Adam take it away, why would a person be interested in owning this note as opposed to Bitcoin?

[00:21:49] Preston Pysh: Give them that value prop from your point of view of like what that does for the investor and then really kind of get into what this is and what you guys are trying to do with it.

[00:22:00] Adam Back: Yeah, I mean the, the note that we launched in 2021 July was a mining notes. So that was, you know, plug miners in into the hosting facilities.

[00:22:12] Adam Back: And James is head of our kind of enterprise sales and customer relationship management. So globally, so, you know, it looks like a big enterprise customer to us. But what the user has is a financial instrument that is a Luxembourg security and runs for that. That one’s a three year note, so kind of fixed term notes and it just mines Bitcoin.

[00:22:34] Adam Back: And then at the end of the term the note holders get, you know, minus like filing fees and administrative fees, they get the Bitcoin mined to that point. And so we are think a burn 26 months in, so there’s like 10 months left to go and it’s mined and I think it’s about 6.8 Bitcoin per note. And there were eight trenches sold and seven of those trenches were sold for less than 6.8.

[00:23:02] Adam Back: So, you know, and it, and it turned out we were anticipating that that note would be actually bought by people with dollars looking to build a Bitcoin position. But it turned out that Bitcoin has bought most of it using Bitcoin itself ’cause we could see the payment method rate. And so even though they did that, it appears they did well.

[00:23:17] Adam Back: So like, everybody except who bought using Bitcoin is already in profit and there’s another 10 months to go. Right? So they’ll be fine. Now, the, the basic note is a different animal. It’s a different strategy. It’s not doing mining. It’s buying Bitcoin, ASICs, the ex buying up excess inventory and holding onto it.

[00:23:36] Adam Back: And until the market gets into a different mode and then selling it back to the market, still new and unused inbox because it’s really a, a, a different market for used miners versus new miners. Kinda late. Used cars, but even worse, like used cell phones or something. Right. Which people generally are not too keen to buy ’cause you know, maybe they dropped it, maybe the battery isn’t so good anymore. In the case of minors, you have to worry like, did they adequately cool it, did they use enough filtration? You know, have they damaged it basically? Right. You don’t, you don’t know how much wear and tear there is on it. And so particularly these, at this point in the market where ASICs fairly cheap, it doesn’t make a lot of sense to most people to buy used miners.

[00:24:18] Adam Back: So, ’cause because one of the questions we get with, with the basic note is, well, why don’t you mine the miners and then sell them afterwards, right? Mine them in the meantime to make a profit. So there’s two problems with that. One is, as we just said, there’s a shortage of power. So we’ve sold out, so where are we going to plug them in?

[00:24:36] Adam Back: Obviously if there was power available, the people selling it to us at cheap price wouldn’t be selling to us at cheap place. They’d be hosting them, so we can’t, right. That’s one answer. And the other answer is, If we did it anyway. So if blog stream like earmarks, some like recent, some new new infrastructure for it, we’d have to charge it to go market rate, which is not that cheap ’cause of the shortage, right?

[00:24:55] Adam Back: And we would convert a, use a new miner into a used miner, you know, for maybe six months and nine months and lose most of the upside in the minor. ’cause then we’ll be selling used miners, right? And people will be asking a lot of questions about, well how did you use it? And you know, how do we know? Can you give us a warranty, et cetera, right?

[00:25:15] Adam Back: I want a discount price. So we think that if there are people that want, you know, the economic benefit of mining, what they could do is buy the basic note for the ASIC opportunity strategy and then separately buy some BMN or a hash rate contract. To have a, you know, partial exposure to hosting and that, that makes more sense then because your miners are still new and you, you know, by, by buying a, a hash rate contract, you’re kind of engaging in a similar activity anyway.

[00:25:47] Adam Back: Right. And then you can see how that would work out. And that might, you know, that might work out okay too, right? But we kept the basic note at, let’s keep the minus new in box.

[00:25:55] James Macedonio: At present, if we were, you know, if we had the capacity of blockstream with, you know, work in additional capacity, you know, we have proprietary modular mining units, right?

[00:26:03] James Macedonio: With much better filtration than most containers. And also we have proprietary cooling system as well. You know, we’d probably feel more comfortable if we were to make a choice and to, to mine, but we don’t have the capacity. So that would create a dependency on other hosting providers.

[00:26:18] James Macedonio: And, I could tell you some of the miners that we received from other providers, it looked like they went through they went, you know, went through the desert a few times in back.

[00:26:27] James Macedonio: Yeah, yeah. So it’s, it’s, it’s risky to, to throw them up online. We do see that, you know, we do see it could benefit, but we think it’s more beneficial. Just keep them brand new and sell them, sell them that way.

[00:26:37] Preston Pysh: Yeah. Alright, so I understand you guys have a chart that you want to display kind of making this graphically visual for people that are looking at the YouTube video.

[00:26:47] Preston Pysh: So, James, are you the one with the chart? There we go. Yes. Yes. I’ll, I’ll bring that shout out right now and then am, can speak about it. Okay. There you go.

[00:26:54] Adam Back: Right. So now if the basic note can be bought, Using dollars or Bitcoin. And so the question is, you know, looking at historical information, how would it have performed if this kind of strategy would’ve been executed in the past?

[00:27:11] Adam Back: Mm-hmm. And so you can see that now, this is in dollar terms, right? So you’ve got the yeah, the yellow line is the Bitcoin price. So that was the, you know, 65,000 and the 69,000 and like early and late 2021. And the orange line. Is the sort of middle efficiency miners, let’s call them. So the miners that were the best in the market back in 2020, 2021.

[00:27:41] Adam Back: Which were a sort of efficiency band, 25 to 38 tools to a hash. And you can see that interestingly, the price of ASIC went from $20 a terahash ish in early 2020, let’s say, say during this period. And went all the way up to 120. And so you can see the, the price is like, had a bigger swing than Bitcoin price is like basically the point.

[00:28:07] Adam Back: Right. So, you know, if you were in and, and actually blog stream did this, you know, we bought some minor inventory back in this period. Early 2021 and late, late 2020. Not to speculate on minor prices, but it happened to work out that rate. Right. The reason we bought them is we wanted to provide instant gratification to enterprise clients because what we found is they didn’t understand a pre-ordering.

[00:28:30] Adam Back: And so they come and they say, yeah, I want to do, you know, our fund wants to do five megawatts of mining. And we say, great, you know, we’ll negotiate your price. You’re wire money to this company in China, and between six and 12 months you’ll have the miners coming in in batches. They’re like, what do you mean I can’t, I can’t turn it on today.

[00:28:46] Adam Back: I’m like, no, it doesn’t work that way. Right. And so then they kind of of be flummoxed and like maybe change their mind or do something with faster action. Right? And saying, we figured, well let’s, let’s buy some of this pipeline so that when they come and they decide they, you know, they’ve made their investment decision, we can slot them in and we can say, well, you know, this month is sold out, but we have another batch coming in so we can put you in between, you know, next month and a month after.

[00:29:11] Adam Back: That’ll be enough to get you online. And so we bought all this inventory and we did end up sending, selling some of it to enterprise customers. We also sold some into the market at different prices. So we found out firsthand that you can make a lot of money. Just buy miners not even powering them up and selling them right before.

[00:29:27] Adam Back: And you, you may not even take delivery of them. Right. You just tell the manufacturer, I’ll ship it to this guy. And then the next time you’ve sold them. Right. So that, that is a kind of history of it. And then the other observation is that even if you look at the, the price of miners priced in Bitcoin, there’s more, you could still make it upside.

[00:29:46] Adam Back: In Bitcoin terms, you know, ’cause the general wisdom is like almost nothing outperforms Bitcoin. Yeah. And that has generally been the case, right? Yeah. You, it’s the best performing asset class. It’s gone up two times on average, although fairly wild swings in between, but the last decade basically nothing else has.

[00:30:03] Adam Back: Now here the point is during, you know, economic cycle, actually there’s a two times upside in this roughly. Where if you had bought ASICs using Bitcoin at the low of the market and sold them and kept the proceeds in Bitcoin at the top of the market while the ASICs labor swung, you would actually have as much as a two times return in Bitcoin itself.

[00:30:24] Adam Back: And that’s, you know, in hindsight with perfect timing and stuff. So that’s like very hard to reproduce, but you can see an effect as there. So now let’s scroll forward to 2023 where we are now. You can see the Bitcoin prices appreciated, you know, 60, 70, 80% year to date in 2023. Sorry. So the Bitcoin price itself is up quite a bit.

[00:30:42] Adam Back: Mining profitability’s improved, but the miners have continued to pull because this over supply. So you can see that, you know, buying miners in Bitcoin terms is extremely cheap, right? And the red one is a newer generation that you know, only came on the market mid 2022. That’s why it doesn’t go back further.

[00:30:59] Adam Back: Right? So, and even those are quite cheap too, right? Sub 20. So, you know, there’s a bit of a judgment call about the allocation to buy. You know, whether we spend that bit more to buy the sub 25 jeweler miners, which, you know, will have, they, they’re all new, but they will have a longer economically useful life, right?

[00:31:18] Adam Back: Because they’ll be more efficient and they might be easier to sell in a wider range of market conditions. So, you know, but then again, the orange, the mid-range ones are quite cheap. So even if you sold them at discount, you could potentially make a healthy profit on those two. So then basically the idea is we’ll just hold that until the inventory gets used up.

[00:31:39] Adam Back: Once the inventory is used up, they’ll be, we’ll be back to the delay where people are placing pre-orders and waiting for manufacturers to deliver them. And at that point we’ll be sitting on, you know, a bonded warehouse full of new inbox Bitcoin, ASICs, and looking to hear what people are willing to pay for them absent inventory to get online straight away.

[00:31:57] Preston Pysh: Right. I’m impressed with the numbers. And correct me if I’m wrong here on the Blockstream mining note, you said 6.8, the average price. You know, I know you did different tranches, but around six Bitcoin to buy that and it seems like people will get another three Bitcoin between now and the end of the, the term of the note for a three Bitcoin gain for somebody that would’ve taken six Bitcoin and and invested it into the note.

[00:32:23] Preston Pysh: So is that the correct math for people that are looking back at that offering?

[00:32:30] Adam Back: I can give you the actual numbers. So tranche seven, 4.8 Bitcoin, sorry, tranche one, 4.8 Bitcoin tranche two seven, Bitcoin tranche three. 5.95, Tran four 5.0. It’s just because the Bitcoin prices pretty close. That’s pretty actually priced in euros, like, and then it’s 4.9 Tran five, 5.3, tranche six, 5.8, Tran seven, and then tranche eight, I guess the Bitcoin price was down a bit and that was 8.13.

[00:32:58] Adam Back: But you can see that, you know it’s mines.

[00:33:03] Preston Pysh: You said 10 months left and you had 6.8 Bitcoin mined.

[00:33:07] Adam Back: Yeah. Yeah, so. So I’ll give you some more data. So 6.85 mines today, another 10 months to go. And because of the anticipation of the, you know, bitcoins to be mined during the next 10 months, it, it’s a security token as well as a Luxembourg securitization vehicle.

[00:33:25] Adam Back: And so you can trade it. And so there are, there are market clear end prices, which are around like 7.3, 7.4. So you can see that all of those trenches, except for tranche eight, are well in money in Bitcoin terms with what the clearing price is. All except two and eight are in money. Just in terms of the Bitcoin, its mind, right?

[00:33:42] Adam Back: And it, and it should sell for more than that. And I would expect just based on like loose number crunching about the rate, typically increase that we’d be around 7.4 Bitcoin by end of year and maybe eight to 8.25 by end of term, like middle of next summer. Yeah, summer 2024. This sounds phenomenal. It sounds phenomenal.

[00:34:02] Adam Back: It worked out. There are risks of course, but it worked out and it actually got a bit of a, you know, a turbocharge from the China Bitcoin man. ’cause they took a bunch of hash rail offline for six months. Oh. And that was all gravy for people who were mining.

[00:34:17] Preston Pysh: Very important points. But yes, and I’m glad that you said that there are risks involved when you’re doing this.

[00:34:23] Preston Pysh: This isn’t like you’re, you know, locking it into a channel that you’re still controlling the keys and things like that. People need to understand that, like any investment. Right. Okay. So I want to take the conversation in a much more technical direction. First, I want to talk about splicing because that’s a little bit different than the other conversation.

[00:34:46] Preston Pysh: I think Adam knows where I’m probably going to go with this conversation. But let’s talk about splicing real fast. Explain what this is, because I was up at the Bitcoin Nashville meetup that they had and everybody was, all the engineers were buzzing about splicing and why this was important for layer two.

[00:35:01] Adam Back: Yeah, I mean, so you’re talking about the lightning technology evolution, right? So people have been talking about channel slicing for a long time. So it’s finally here. So that hence the technical buzz. And what it does is normally you open a light, the evolution of a lightning channel is you open it, you use, it eventually gets closed down because you know one part’s had enough or they need the money back, or the other party went away or something like that, right?

[00:35:25] Adam Back: Or it got too imbalanced and they can’t figure out how to rebalance it. And what people do when they get too imbalanced is they like, close it and open another one. And so, you know, what splicing does is it allows you to add additional capacity into an existing channel. So send some Bitcoin to the channel and it can actually be under fairly continuous operation while you are adding more capacity to it.

[00:35:47] Adam Back: So it’s smart enough to handle, you know, the capacity is like almost depleted. You’re still transacting a PL transaction comes in. Channel capacity goes up and then you switch over to, you know, suddenly the capacity goes up and you can send more or receive more. And you know, then there are other ways to get to sort of rebalance the capacity already in a channel which is not splicing like submarine swaps.

[00:36:10] Adam Back: And so a relatively new novel development, there was Bolts hq, which they do submarine swaps between Bitcoin, UTXOs, and the lightning channels. So they would sort of send you some liquidity and accept your UTXO or you can send them some SATs. And they will send you a UTXA. But in the fee runup that was caused by, you know, the temporary trend of ordinals and in descriptors that caused the problem.

[00:36:36] Adam Back: And so what they did to work around it is they implemented a liquid Bitcoin to lightning submarine swap. So it’s, it’s trustless, it’s atomic, but it’s cheaper and faster. And so, you know, now that it’s in place, apparently a fair proportion of their use remains liquid Bitcoin swaps. They’re interesting.

[00:36:53] Adam Back: So there, there are now, like, you know, three or four ways to get capacity. One is to close the old channel, open new one, which is the old one, old way, or sometimes people just open multiple channels. So they have like multiple channels between the same piers, which is. Kind of a bit, a bit odd, but that was what people were doing.

[00:37:08] Adam Back: Now we have splicing and then you have these kinda submarine swaps between main chain, which is less efficient than splicing. So I think splicing would re replace that wand. And then the submarine swap with liquid is interesting ’cause that doesn’t actually use any main chain space. And it’s cheaper and faster than doing it on a main chain even than a, than a splice.

[00:37:25] Adam Back: Right? Doesn’t involve any main chain activity. And you are, you know, basically paying somebody with liquid Bitcoin to push some SATs back your way, to rebalance your channel.

[00:37:35] Preston Pysh: So I’m glad you mentioned this. So liquid was, for all intents and purposes not being highly used. All this ordinal stuff and the wizards leading up to the Miami conference were spamming the layer one with JPEGs and NFTs and all this stuff.

[00:37:53] Preston Pysh: And the fees were blowing out and all of a sudden everybody started using liquid. Not everybody, but I mean there was a, a lot of people starting to use liquid that weren’t using it before because the fees were so high on layer one. This leads me to what I would say is one of the hottest topics in Bitcoin is this discussion around can Bitcoin actually scale without pushing a centralization on layer two?

[00:38:19] Preston Pysh: And I, this is where I really want to go because there’s so much conversation right now around this idea of drivechains and offering this alternate way to do, to basically take your Bitcoin and do a peg into these chains that are the side chains off of Bitcoin and. This is BIP 300. There’s a, a gentleman named Paul who’s out there really promoting this hard.

[00:38:46] Preston Pysh: I think that there’s a lot of interest from the mining community to do this because it will allow them to have higher fees because they would be the ones setting up federations allowing, or basically employing these side chains. But I think a lot of users and people that are not miners are pretty against this, me being one of them and just open kimono.

[00:39:08] Preston Pysh: The reason why I’m, you know, kind of anti drivechains is I really don’t really need any of this capability of any of these other blockchains or sidechains capabilities, like anonymity or whatever. I just need Bitcoin to continue to be a store of value on layer one. I don’t need it to immediately settle.

[00:39:27] Preston Pysh: I just need it to preserve my buying power and to actually peg global fiat currencies that are run amuck and destroying the world and create and clown world. That’s all I needed to do. Right, right. So I’m much more in this ossification camp. I know sailors in the ossification camp, but engineers and I got my un, my undergrad in engineering.

[00:39:47] Preston Pysh: I get it. They want to build things and they want to do swoopy things. What is your opinion, Adam and James, with respect to drivechains? Can we scale? Is it important that we scale? Like talk about it in a very broad sense, like what’s actually important here? And then give us some of your opinions on drivechains and scaling.

[00:40:09] Adam Back: Yeah, I mean, the fact is blockchains don’t scale. Well, you know, that was the underlying cause of the so-called blockchain war back in 2015, whenever the series of events was. And I think the outcome of that was kind of market was a market solution, which is the market preferred what you’re saying.

[00:40:28] Adam Back: Right. Which is they wanted censorship resistant, highly secure, anti decentralized Bitcoin as a store of value, and to be able to transact that when they needed to move, you know, value around. Right. And the challenge was, you know, to to scale that in a simplistic way would erode that value. Right. You know, if the blocks were enormous, it would be hard to validate, it would tend to get pushed more into data centers, and it would, there’s a fair chance it would become less decentralized and less censorship resistant.

[00:40:58] Adam Back: So the market was saying, well, we, the buyers of Bitcoin like it the way it is. And you know, so all the forks lost in the market and that that’s where we are. Right? But in the meantime, I think the, what you’ve seen is that the market is like sort of the vendors, like the exchanges, the wallet providers are not that proactive, are planning ahead for fee market increases.

[00:41:20] Adam Back: And so what they will tend to do is wait until something breaks and then they’ll look around for some workaround rate and then they’ll go back to their business once they’ve solved the major problem. And you know, you saw that, you know, eventually people started deploying lightning because fees were in a period where previous period where fees were high.

[00:41:37] Adam Back: And that’s good because you know, for a lot of uses you don’t really need it to be on the main chain ’cause it’s a low assurance transaction and it’s a lower value transaction. And of course ultimately, you know, because we’re enthusiastic, like, you know, each of us who are Bitcoin investors and holders are enthusiastic about the properties of Bitcoin.

[00:41:53] Adam Back: We’d like as many people who are as are interested to, you know, benefit from those same properties to be able to do it. And there isn’t enough space on the chain for that to be the case today. So, you know, the lack of a technical capacity won’t stop on economic activity. So they’ll end up using custodians or, you know, storing things in lightning and evidently storing things in liquid.

[00:42:14] Adam Back: We’ve seen, you know, a number other organic uses, like people doing dollar cost averaging, buying in liquids, and then, you know, like daily or weekly. And then when they get to the threshold, they’ll move it to the main chain. So that’s the sort of way of. Storing intermediate or active trading on liquid and moving to Bitcoin for cold storage, which is, you know, of course the main chain is the best cold storage technology.

[00:42:37] Adam Back: And so the drive chain is, you know, I guess you could say it’s kind of like a, a more decentralized liquid, right? So they just want to see, and, and some bitcoin layer two things aren’t really feasible without additional op codes in like for the programmability of the anchor. And so that, I mean, that’s why liquid is federated, right?

[00:42:57] Adam Back: Because that’s sort of close to the limit of what you can build without new op codes.

[00:43:01] Preston Pysh: Is it Adam, and just so I can wrap my head around this, yeah. Okay. So you already have liquid, right? It’s a blockstream federation that you have set up. If people want a Monero like capability as far as nobody knowing what transaction’s happening, they can peg into liquid.

[00:43:20] Preston Pysh: They can have a liquid BTC. They can move that around in a very secure way in which nobody would know what the, what the transactions are. And then peg back out. The, the argument that I keep hearing with drivechains is, well, now you can do Monero on with Bitcoin, you can pop it into this side chain.

[00:43:41] Preston Pysh: You can go do these things. Nobody will know who you’re sending the money to or what happened. And then you can deeg it back into Bitcoin if you want. So that’s, that’s their rationale. That’s pretty much the only reasonable rationale that I’ve heard use case outside of Bitcoin is the Monero argument.

[00:43:57] Adam Back: Right. But my well they have another one as well, which is, you know, let’s say is a back of the envelope that the main chain can handle a hundred million users and there’s demand from a billion users and. The best technology for, you know, saving and bear resistant money. Censor resistant money is UTXO.

[00:44:18] Adam Back: And so to get to a billion people with UTXOs, there’s not enough UTXOs. And so, you know, you could have a drive chain. I mean you could do some of it on liquid, that’s one solution, but it’s not as censorship resistant ’cause it’s a federation operated by, you know, dozens of exchanges and what have you.

[00:44:34] Adam Back: Right? So ultimately there’s, there’s more censorship resistant risk, especially for the long term, right? Liquid is more about active trading and then people take it out and cold store it. And so their idea is, well, You could have a mind drive chain, which is let’s say 10 times bigger than the main chain.

[00:44:51] Adam Back: So it’s not as decentralized, but it’s still sincere resistant ’cause it’s mined. And that would give, you know, instead of the fallback being custodians or, I mean there are, there are other things too, right? Like other federations like fdi. Right? But, you know, if we keep it to the UTXO model, then at least they could get a UTXO, even if, you know, the, the people that can’t afford to get onto the main chain, ’cause it’ll come down to a cost rate, would get a kinda light UTXO on a drive chain.

[00:45:17] Adam Back: So I think that’s their idea. And, and of course it’s, you know, it’s, it’s a modularity layer. People can implement experimental features in it, but they don’t have to, they could just make it, you know, a Bitcoin copy that’s got bigger blocks basically.

[00:45:28] Preston Pysh: So Adam, are you concerned about the incentives getting warped for miners because now they’re focusing on these federated side chains that they’re managing from an energy consumption standpoint, a time consumption standpoint versus just mining blocks on layer one?

[00:45:46] Adam Back: Yeah, I mean, it is definitely, you know, I think people had the hypothetical that, you know, with merge mining if a side chain, you know, ’cause the original side chain paper by Blockstream had the same kind of, you know, merge mining activity. And then we had, you know, an an appendix with. The federated alternative, like what you can build without op case.

[00:46:09] Adam Back: Right. And so, you know, the, I think in the original paper we say that like, well, you know, potential concern could be that a lot of economic value piles up in the, in the side chain, and then miners are, and something goes wrong there, and then they’re incentivized to reorganize that. So I think, you know, one thing that can be done to avoid an incentive clash is for the, you know, for the miners to be able to reorganize or fix the side chain without reorganizing the main chain.

[00:46:37] Adam Back: Like, what you don’t want is a. Some economic driver like pushing to undo Bitcoin finality because of something that’s happening over on the side that you don’t care about personally, right? So you don’t want that, but if it can be, you know, if it’s not in lockstep so that you know, they can be undoing a mistake over there while continuing to mine the mainstream forwards, maybe that’s not as dangerous.

[00:47:00] Preston Pysh: Another idea that’s popped up is arc. This is coin pools. Explain what this is, and then your opinions on the feasibility of arc.

[00:47:11] Adam Back: Yeah, I, I don’t really have a clear picture on how that works, actually.

[00:47:15] Preston Pysh: It seems very complex. Yeah. Like you have service providers that are basically consolidating UTXO sets.

[00:47:21] Preston Pysh: They’re issuing virtual UTXO sets to the participants because there’s such a high amount of liquidity that’s required in order to run these service providers. There’s like a duration that you have to. Renew every 30 days. To me, it sounds very complex. It seems somewhat centralizing, but I’m curious, no opinion.

[00:47:42] Adam Back: No, I don’t, that’s the smart way to answer that question. I don’t, I dunno enough to know. I mean, he seems enthusiastic and to claim that it should be quite scalable and that, as he said, you have to, you know, resell them on the chain periodically. Yeah. So they don’t live very long. So, I don’t know. I guess, I guess that means not good for cold storage perhaps, but maybe, maybe a kinda lightning alternative if I, I don’t fully understand how it works.

[00:48:07] Adam Back: Yeah.

[00:48:07] Preston Pysh: Yeah. And I think that is the, what they’re going after as a lightning alternative. But yeah, we’ll see, and I, from what I understand, it requires hard, a hard fork on layer one in order for some of this to happen. Any other comments with respect to covenants, APOs, OPCA? You know, you, in the chat that we were having on Twitter, you had mentioned that some of the opca from like 2010 had been turned off.

[00:48:33] Preston Pysh: Is, was originally in the original code base had been turned off. And that, and this is something I was not aware of until you said this the other day, that that scripting pre-existed and it was turned off for safety, security reasons, just to simplify the code and make sure that we get store value right.

[00:48:51] Preston Pysh: Early 2010 timeframe. But now you think maybe it might be a time where some of that can be turned back on. Would, would that be turned back on with a soft fork in order to enable a lot of the scripting and, and smart contracting that, that we’re talking about earlier?

[00:49:08] Adam Back: I mean, I think the problem with those op codes is they turned out to have security bugs and the simplest fix was to disable them.

[00:49:16] Adam Back: So that’s what, that’s what was done. But you know, you can, you know, whether they had like an actual bug or, you know, desire, service risk, but you can, you know, you can have, you can use those things in a safer or constrained way. And like, we’ve had a few of them in liquid for a few years now, like OP and check Stick for Sick from Stack, and a second version of check Stick from Stack with, you know, about 30 helper functions to help with serialization, covenant Serializing, covenant ashes.

[00:49:47] Adam Back: So with no issues.

[00:49:49] Preston Pysh: Issues with no issues or concerns or is, has there been anything that you’ve, that you have implemented that you’ve kind of, I guess I’m asking this question just as like a test bed, right? So you’ve done it on liquid. My understanding is that some of this stuff was actually, reemployed on Bitcoin cash whenever they did their hard fork.

[00:50:07] Preston Pysh: Has there been anything that we’ve learned since that hard fork with Bitcoin cash with respect to op codes that, or op cap, that is something that, that a learning point for maybe future employment into the base code?

[00:50:20] Adam Back: I dunno much about What if anything happened on the Bitcoin cashbook? I do, I do know that they copied some of the op codes, which is kind of interesting.

[00:50:29] Adam Back: And there, you know, people have implemented some interesting things using it like. Because it’s liquid. There are other assets in there like stable coins. So you could implement like a signed a half signed limit order and with the cat and check sick from Stack Covenant, you can implement a partial match limit order.

[00:50:49] Adam Back: And so, and, and like other things, right? So people have implemented some interesting things using them not you know, in, in a kind of experimental way, right? That it is kind of specialized area. There’re not that many people that have the expertise to implement using the Bitcoin script or, or like liquid script extensions to it.

[00:51:08] Adam Back: But still it shows, you know, that you can do interesting things, whether people have, have tried it and seen that it works. And we added those OP codes to sort of refine it based on, you know, the experience of running it without those helper functions, it was more cumbersome, right? And yes. So at this point there are.

[00:51:28] Adam Back: Probably half a dozen variants of how you could get to covenants. I think covenants are probably desirable to get a little, little bit more expressiveness. So I, I think the thing is, you know, the. The capability to do covenants was probably there or almost there in early Bitcoin before those sort of buggy op codes were disabled for safety reasons.

[00:51:48] Adam Back: And if bitcoin script is made expressive in a number of different directions, there’ll be a line that crosses where, oh, now you can implement covenants. And so it’s not, you know, it’s not like we need a specific covenant op code, but like, oh, a P o maybe that allows you to implement a covenant or cap maybe that allows you to implement a covenant.

[00:52:05] Adam Back: So you know, it’s just on the cusp of accessibility and there are benefits, you know, that you can implement vaults, for example, which I think is quite useful for cold storage. So things which, you know, provide a benefit to long-term secure storage are pretty interesting, right? And maybe help make secure Bitcoin layer twos, right?

[00:52:25] Adam Back: So maybe arc benefits or lightning benefits in transferring security from the main chain to a layer two. Then it’s good because more things can happen on layer two. So that’s the thing. I mean, I think like personally, that probably what. The best way to, you know, figure out which of the variances better is to, you know, people to get together a kind of hackathon or people that do script op code coding and try to implement, you know, one using the other.

[00:52:52] Adam Back: Like see which ones a super set of the others and implement common things with them and see which ones, you know, work in practice or have limitations. Because it shouldn’t be about, you know, championing one because of its history or ’cause you, you know, you like it or what have you. Right? It should be, well, we don’t, none of us should really care which one philosophically is adopted.

[00:53:12] Adam Back: We should just want it to be the best, like, you know, lowest risk most flexible, easy to combine with other op codes and. Do what’s needed to do to be done so that we don’t find like, oops, we forgot, you know, about this whole optionality and now we need another up, another up code to do half of what we thought it did.

[00:53:31] Adam Back: Right? We don’t want a surprise like that. So we’ve got to, people should, you know, compare and contrast and try and implement them to figure out which ones are equivalent and which ones are more powerful.

[00:53:40] Preston Pysh: So, yeah. If I had to summarize it, it sounds like you’re saying that the op code trying to focus in on, on one or two or three op code updates is a, what’s the word I’m looking for?

[00:53:54] Preston Pysh: A safer path forward instead of drivechains? Or is that not what you’re saying?

[00:54:01] Adam Back: Well, I mean, they’re slightly orthogonal, but it’s, you know, there, there are probably ways to implement drivechains or simulate drivechains. Like you could probably build a drive chain in a, in a, with a federation. I think Rootstock has done something a little bit like that using HSMs and a federation and merge mining and, you know, it might be that you could implement a drivechain using any of these covenant op codes, for example.

[00:54:26] Adam Back: Right. So it’s a drivechain is like a little bit simplified from a generalized side chain, and so it, it doesn’t take as much expressiveness or complexity to, to implement it. Yeah. So I mean, I think that, you know, sooner or later it is hard to like, exclude things to say, well, we want volts, but we don’t want, we don’t want drivechains or, you know, we want this or not that.

[00:54:49] Adam Back: It’s not really controllable. Right. It’s like a machine code level thing. If you have a new. C P U code for array indexing. Well it’s, and you didn’t have it before. It’s going to make a lot of things in easier to implement, but you can’t target like what it does ’cause it’s too low level to, to have much steerability.

[00:55:07] Adam Back: Right. So I just think sooner or later we’re going to be able to, you know, we’re going to want vaults ’cause they’re good, we’re going to want ln symmetry because it’s good. Like a more efficient variant of lightning with easier cold storage without needing to keep backing upstate. These are all good things, right?

[00:55:22] Adam Back: And you know, unless you like write a really specific CIS constructions, do that and nothing much else, it’s going to be hard to prevent it being, and that would be a kind wrong design, I would say, like from a risk design point of view. So we’re probably going to end up with some accessibility that enables more use cases anyway.

[00:55:39] Preston Pysh: Now this, is this your way of passively aggressively selling simplicity on the, the community?

[00:55:46] Preston Pysh: Well, so I mean, I do think that simplicity, let, let me define that for people listening real fast, Adam. So simplicity is this low level typed Combinator base, smart contracting language. It can literally fit on a t-shirt the size of this that Blockstream wrote, and correct me if I’m wrong here, but this is, this is what you would like to be incorporated into the base layer, Adam, in order to allow smart contracting on Bitcoin.

[00:56:13] Preston Pysh: Layer one is did I properly frame that? If I didn’t, please define it and then answer the other question.

[00:56:19] Adam Back: Yeah. So I think that, I mean, I’m not really, I mean some observers have said that like bitcoin contributors, that they would like to see a PO to enable symmetry. Then simplicity, like they want to skip straight there. It depends, right? It depends on the timeframe because simplicity, you know, is in development, it’s been in development for a while, it’s getting premature. We’re getting pretty close to being able to put it onto liquid and live use. And I would say that simplicity is kind of the last soft walk. So it has enough, much lower level self extensibility, kinda like microcode for CPUs that you don’t need to keep designing and, you know, analyzing which OP codes to add accessibility here and there.

[00:57:03] Adam Back: You can do it in one shot and say, well here’s the microcode that allows us to implement new op codes. And so in a way it’s less controversial, right? ’cause you’re saying, well, do you want, do we want the extensibility or not? And if we do, we don’t need to have design bakeoffs for op codes because people can figure that out, like organically in the market.

[00:57:21] Adam Back: And simplicity because of the specification simplicity, like nine Combinators, and it’s comparability with formal proofs and proof assistance. It can provide very high security assurances, you know, arguably higher than the current Bitcoin scripting system. And it’s like a soft fork ball, you know, script version.

[00:57:40] Adam Back: So it doesn’t make displace anything. It’s opt in kind of thing. So I would say that probably simplicity is our best chance to get to, you know, real ossification without feeling like we’ve accidentally cut off something that nobody falls saw right now, or that needs to get fixed in, you know, fixed in the future.

[00:57:57] Adam Back: Like, I don’t know, post quantum signature schemes or something. Right. Because you all those kind of things can be implemented with simplicity, but I wouldn’t necessarily throw it into the, you know, how, which way should we do covenants or should we do covenants at all because. Timeframes might be off. You know, it’s a little further out.

[00:58:14] Preston Pysh: My gosh, there’s a lot technically going on in this space. I think it’s getting, I think it’s getting really hard for just common Bitcoin users to really kind of like, they’ll hear that whole conversation and they’re going to be like, alright, I feel confused. I feel lost. Like, is is there an issue? Is there a problem?

[00:58:32] Preston Pysh: Can Bitcoin actually scale? I’m kind of curious, James or Adam, your thoughts kind of to close this out for the listener that just heard all of that. Like what’s the key takeaway? And if you can’t put people at ease. ’cause I think the future is very bright. When I look at Bitcoin, this is my opinion, right?

[00:58:51] Preston Pysh: I’ll give my opinion here first and I’m kind of curious to hear you guys follow up. Bitcoin is solving clown world. Period. Like there’s a major issue in the world and it’s that all this fiat money is not backed by anything. It’s not being pegged to the wall, and people aren’t being held accountable and they’re just making up more and more digital units on a whim, and they’re handing it out to the people that are closest to the money machine.

[00:59:14] Preston Pysh: That that goes to solve that. Bitcoin is this peg that’s solving that the store of value issue for large bond tranches. We’re talking trillions of dollars worth of buying power that Bitcoin is trying to solve and, and hold these. These actors responsible so that they can’t just make up as many fictitious monetary units that they want on a whim.

[00:59:38] Preston Pysh: All this other stuff that we’re talking about is on like immediately settling Bitcoin, making it scalable so somebody can go out there and spend a 10th of a penny, is really kind of what we’re talking about technically, but enabling a lot of this into the layer one where most of this store of value technology is taking place is enabling that so a person can conduct those transactions on layer one and not just layer two.

[01:00:02] Preston Pysh: So I think Bitcoin solves clown world even if we don’t do all of those things. I think there’s a lot of engineers that would disagree with me and that’s fine, but I, I also think that a lot of those engineers that would disagree with me, Really don’t understand how the global macro debauchery, like what’s causing it and what actually solves it.

[01:00:24] Preston Pysh: And I think what actually solves it is being able to actually send, like, Adam, if you give me an invoice for $10 million and you say I want it delivered in the next 30 minutes, or else you know that if I can’t send that to you, it’s because I don’t have it. Right? If I can’t get that transaction into the men pool, you know, I don’t have it and you know I can send it.

[01:00:45] Preston Pysh: I don’t even know where you’re at in the world, but you could hold up a QR code on this video right now and I could send you that Bitcoin if that arrangement was there, right? That’s what Gold can’t do. That’s why gold has always failed throughout time is because you can’t immediately settle and inventory the amount instantaneously.

[01:01:04] Preston Pysh: Right. Right. So as long as Bitcoin can do that, I think we solve clown world and a lot of this engineering talk and, and like the nuances of all this really specific stuff, you know, that use case is still there, which I think puts the, an enormous market cap on Bitcoin way higher than where we’re at right now.

[01:01:22] Preston Pysh: Because it provides that service of store value. Right. Let me hear your opinion.

[01:01:28] Adam Back: Well, I mean, yeah, I am interested in investing in asset classes and used the whole gold ETF, which according to my research, was one of the ones that was physically backed. got to pay attention to that. So I think it’s actually correct that even if Bitcoin or SU supply today, you know, we live without the vaults, et cetera.

[01:01:49] Adam Back: Right. And even if a large amount of it. Ended up in ETFs, so it wasn’t actually transacted on chain or it was in custodial wallets, it would still reach 90, 95% of its kinda monetary potential. It would mean that, you know, maybe it’s hard for, there are a hundred million users today, it’s hard for the next billion to have the same degree of since shit resistant bearer control of their own money.

[01:02:15] Adam Back: Right? Now, not everybody is going to do that. Some people are, you know, they want to call their broker and buy an ETF and that’s what, that’s what they want. And they don’t, they don’t feel comfortable with the key management. Some people are always going to be like that, right? So we can’t fix that. But for the people that do want, you know, get interested and want to have control of their keys, I think that’s, you know, that provides extra, extra assurance.

[01:02:36] Adam Back: And so I think some of the technology is about, well, you know, how could it scale like the, the basic technology doesn’t scale. So if you don’t want to make a compromise on the main chain and like the grade, its performance for everybody. Can you give these opt-in spaces and they turns out you can Right.

[01:02:53] Adam Back: Lightning, you know, it has some security trade offs. You have to be online. It’s kind of a hot wallet. Maybe you don’t want to store like savings amounts in it, but it’s okay for retail payments. Okay. That took a bunch of transaction use out of the main chain and like same for liquid. Right? Okay. People are actively trading and moving Bitcoin between exchanges.

[01:03:10] Adam Back: The main chain doesn’t really need to know about that. Right. They’re moving an I O U from one platform to another. And so, you know, perhaps like the more decentralized side chains have a place there, we’ll we’ll see. Right. So it would be a kind of middle ground where, you know, it can be as if there was a big block, but they can opt into it.

[01:03:27] Adam Back: The interesting question is whether the incentives leak into the main chain anyway, even though it’s an opt-in thing. Right. And that’s, that’s a hard thing to categorically conclude on.

[01:03:38] Preston Pysh: James.

[01:03:39] James Macedonio: Yeah, you know, I think there are a lot of complexities around this, but if you compare it to banking system and the payment systems are out there already, there’s a huge amount of complexity there.

[01:03:47] James Macedonio: But it, it’s a new language, people learning. So it’s a, it is a more of a maturity that I feel is needs to be adopted by the world and understand, you know, the benefits, right? And, and making this easier to transact is I think is going to help with the adoption, right? So when you start pulling things off the main chain, you could do with speed, you could do it you make it simpler for people to use.

[01:04:08] James Macedonio: I think we want to see a lot more adoption. So that’s my, my opinion on that.

[01:04:12] Preston Pysh: Guys, I could talk to you all day and I’ve got another two pages of questions here, but I’ve taken way more of your time than I told you I was going to take. And I appreciate your time immensely. This is a real pleasure and honor for me to be able to talk with you guys.

[01:04:28] Preston Pysh: And just really appreciate your insights. So thanks for making time and coming on. Give people a handoff if, if they want to learn more about the basic, which we were talking about where they can find more information on that. And anything else that you guys want to highlight?

[01:04:42] Adam Back: Yeah, I think, I guess the best link is probably just blockstream.finance.

[01:04:46] Adam Back: It takes you to the landing page and the link for Stocker, which is the Luxembourg securitization provider that does the kind of regulatory setup and operates the securitization compartment on a regulatory basis. And I guess they’re also kind of the share registration agent that you enroll with in order to to buy and hold the tokens.

[01:05:08] Preston Pysh: Okay. We’ll have a link to that in the show notes. Anything else that you want to highlight, James? Well, I, I think the basic fund almost sells itself. If, if you look at the correlation.

[01:05:17] Preston Pysh: Bitcoin to ASIC prices.

[01:05:18] James Macedonio: Historically, they, they’re, they’re pretty much, they’re highly correlated. But if you look at 2023, there’s a separation, which kind of suggests a huge price correction coming.

[01:05:28] James Macedonio: We feel that the risk is, is minimal, even though there are always risk, they’re minimal because of the low prices of basics, really not much further they can go other than not. So if you think about the, the ASIC prices that is high, there were about $120 per terahash. Bitcoin was just below 70, right?

[01:05:44] James Macedonio: Bitcoin is, you know, shy of shack that now where the ASIC prices are about a 10th that so, you know, when ASIC prices start recovering, we’re going to see, you’re going to see a lot better return than will just seem that you would normally just see holding Bitcoin. So I think it’s very exciting and I’m hoping to have the opportunity to talk to people about that.

[01:06:04] Preston Pysh: Awesome. Alright guys, well, we’ll have a link to blockstream.com/finance. We’ll have some links to your social media as well. And thanks so much for making time. This was a blast. Thank you.

[01:06:17] Adam Back: Yeah, thanks.

[01:06:18] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm.

[01:06:24] Preston Pysh: So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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