WBD515 Audio Transcription

Bitcoin is a Black Hole with Harry Sudock

Release date: Friday 17th June

Note: the following is a transcription of my interview with Harry Sudock. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Harry Sudock is a Vice President of Strategy at Griid. In this interview, we discuss whether Bitcoin’s real innovation is the fusion of Proof of Work and the difficulty adjustment. This enables it to exert a gravitational pull that’s disrupting money, assets, technologies and organising structures.

“The economy is not a combustion engine, where you change a fan belt, and it starts or stops. The economy is a large, complex multivariate emergent social phenomenon. And because of that, when you poke one side of the bear, you don’t know how it’s going to react. And it’s an incredibly volatile and incredibly complex place to try to play God. And so the best choice is not to do it.”

— Harry Sudock

Interview Transcription

Peter McCormack: Good to see you, man.

Harry Sudock: Good to see you too.

Peter McCormack: We've got to stop wobbling this table, because we've been wobbling the camera.

Harry Sudock: Elbows off.

Peter McCormack: Elbows off.  With your amazing voice, you don't need to come so close to the microphone!  So, let's set the scene; I think Danny's going to join in a little bit of this, even though he wasn't even at dinner.  So, to anyone listening, you, me and Harry made a show the other day and then afterwards, we went for dinner and we just went down this rabbit hole of a conversation.  We were like, "No, that's the fucking show we should have made!"

So, we're back recording.  The other one is going to go into the dumpster file, we'll do that another day.  So, let's set the scene.  You said that Bitcoin's a black hole, and I was like, "No, I think Bitcoin is the singularity", which is kind of the same thing, like I think it's two concepts.  Bitcoin is the black hole, but there is a singularity.

Harry Sudock: And full disclaimer, neither of us are physicists, and so we're going to butcher some physics concepts today.

Peter McCormack: How the fuck do you know I'm not a physicist?

Harry Sudock: Visually.  You're too good-looking.

Peter McCormack: I got a C in physics at school, I was shit.  But I am a bit of a space nerd, so I listen to, I think his name's Paul Sutter, he's got a thing called Ask A Spaceman.  It's like the What Bitcoin Did version of astrophysics; he does it for dumbasses!  It's amazing.  I watch every space documentary; I've just watched the one on Netflix where they were trying to photograph the black hole, amazing.

Harry Sudock: Yeah, that was really good.

Peter McCormack: So you said, "Bitcoin is a black hole".  I was like, "The goal is the singularity".  I assume if we google this, somebody else has already come up with this concept and written about it.  If they haven't, we or I or you should do it, but I felt like actually, this is a really interesting conversation.  Do you want to give the background, because you'd obviously been thinking about it?

Harry Sudock: Yeah, and so the origin of this for me was, I spent a lot of time recently thinking about, what is Bitcoin's actual core innovation, and we hear words like "double-spend problem" and "Byzantine generals problem", but that's not actually the core innovation; that's the outcome from the innovation.  So, I did a tweet that said that, "The difficulty adjustment plus proof of work is the innovation", and I've been workshopping that and thinking through that idea more and more.  And Gigi has done a lot of thinking around, Bitcoin is time, and a lot of these concepts, and Peter Todd has worked on OpenTimestamps project, and I think there's a time lag to this.

But the unlock for me was the ability to say that Bitcoin tethers itself to physics in two different ways.  Proof of work is the digital representation of the physical world, it's energy; and the difficulty adjustment is the representation of time, because we cannot deviate from the target of an average block time of ten minutes.  So, the combination of the tether to the physical world and the tether to time, in tandem has solved the Byzantine generals problem, has solved the double-spend problem, has solved all of these, more of the computer science component of the project. 

But it's really those two core innovations first and foremost that has allowed Bitcoin to be an order of magnitude, or multi-order of magnitude improvement on some of the existing technology stack.  That, for me, is why it starts to look like a black hole.

Peter McCormack: Right, okay, let's go back a step.  Let's make an assumption that some people listening won't know what we're talking about.  Some people might not have gone down the rabbit hole.  They might have heard of proof of work, they might have heard of the difficulty adjustment, but let's explain what each of those are, as simple as possible, so people get a grip; and why, as an innovation, they're so important.

Harry Sudock: Yeah, so proof of work, we have Adam Back to thank for inventing that, and it preceded Bitcoin.  It was the innovation that the contribution of computing power to a network is the mechanism by which the cryptography is validated.  So, what do we mean by that?  Bitcoin is encrypted.  That means that the SHA-256 algorithm that governs the discovery of new blocks uses what's called a one-way hash function.  That means that you put one thing in and something else comes out the other side of the hash machine.  And the ability to trace back what came out is not there.  So, the reason that Bitcoin works is that it's very secure, so you are required to have the private key in order to spend the UTXO.

All of this comes together and works because of a combination of the cryptography around the actual wallet; but then also, the security around the hashing function of discovery of new blocks.  There's two security concepts there.

Peter McCormack: Okay, and that's proof of work, but talk about the actual proof of work in terms of unforgeable costliness and why that's important, because at the moment, Ethereum, an alternative cryptocurrency that some people are in favour of, some people think is a bit of shit, is migrating from proof of work to proof of stake.

Harry Sudock: Yeah.  So, proof of work and proof of stake are important to understand when you think about money technology.  What proof of work does is it sinks energy into the system and there's no getting it out once you've sunk it in.  So, what do miners do?  They plug in a ton of servers, those servers consume a tremendous amount of electricity, and they put their computing power into the effort of discovering new blocks and earning Bitcoin revenues.

Once that energy is spent and once those blocks are discovered, there's no getting it back.  So, the incentive structure around proof of work is such that the good behaviour of the miners isn't insured, but it's game-theoretically incentivised.  And so, all the miners are spending the money on construction of their mines, and spending the money on moving the dirt and digging in the ground and buying the servers; and then, they're spending the money on the energy every single month.  So, there's this enormous sunk cost into the activity of discovering new Bitcoin blocks, because it's very, very valuable in order to get your hands on new Bitcoin.

So, there's this enormous game-theoretic incentive to continue to behave well, because the only way you're going to get any value out of those proof-of-work servers is to continue to support Bitcoin and to continue to generate Bitcoin revenue.  So, there's this enormous industry, many, many billions of dollars in today's purchasing power, that are contributed to the activity of securing the Bitcoin Network through the constant spend into energy, constant spend into new servers, and this is an incredibly high-value activity, and we can go into why all these business models are exciting, but it's an incredibly high-value activity because each new block continues to affirm the security of all the past blocks, and so there's this incredible cumulative effect that's happening and it's exogenous to Bitcoin.

So, the burning of the time and the expenditure into the energy is a sunk cost, it's exogenous to Bitcoin; whereas, if you look at a proof-of-stake environment and why that's different, the "sunk cost" is endogenous to the alternative system, it's inside the system.  So, the people who own the most of the token get to make the rules and get to determine how much of the token gets moved.

Peter McCormack: Sounds like the current central banking system.

Harry Sudock: Precisely.  So, proof of stake is this stakeholder concept, so your ownership percentage equals your influence.  In Bitcoin, we've severed that relationship.  So, whether I own 1 Bitcoin or 1 million Bitcoin, my ability to influence the system is unchanged.  That's an incredibly, incredibly asymmetric difference in how the system functions and how the incentives are aligned.  So, just by running one node, you have an equivalent voice within the Bitcoin ecosystem relative to a different node, regardless of how many UTXOs are owned by that node-holder.

This is the social component of this, where we talk about rough consensus, we talk about these ideas around the Bitcoin Network and the Bitcoin users governing the software.  Those are the people who have levelled the playing field with each other, rather than rewarding those who own the most.

Peter McCormack: And with proof of stake, we should say that Ethereum came with a significant premine, which was the distribution of tokens to people involved in the project.  In a scenario of proof of stake, they've established the monetary policy, they've distributed a large amount of tokens to themselves, and now they benefit most from the issuance of new coins, and control of how the system goes.  I see how someone could argue that they've essentially established a blockchain-based kleptocracy.

Harry Sudock: I'll tell you a brief story about the summer of 2020, when I was in a Clubhouse room that was screaming about Bitcoin and Ethereum, and everyone was arguing with each other.  And I think it was American HODL who was speaking at the time, and he ran through exactly what you said.  He said, "Well, there's this huge premine and now the large holders of the token are introducing rules that make the large token-holders the rule-makers and the deciders of how everything works".  And there was a kid, who had to be probably 19 or 20, who was a big Ethereum maxi, and he was like, "Wait, wait, that's how it works?"!

So, it was clear that he'd come into Ethereum later, hadn't understood the history, the DAO, the mechanisms at play across that historical context, and was in this room with a bunch of toxic maximalists who showed him, "This is the system that you're assigning your time to", because at the end of the day, money is a representation of your life, it is your time.  And I think his eyes were open to this idea that maybe this system that he was opting into didn't deliver on the value proposition that he expected. 

It was very shocking and very challenging for him, but ultimately positive, because he was able to understand that Bitcoin, by design, does not function that way, it does not reward economies of scale to the large holders.  It is a naturally centralising force within an ecosystem that purports to be decentralised.  Proof of stake is fundamentally centralising and fundamentally untenable on any long-term basis to support any positive sum economy.

Peter McCormack: And people will talk about fair distribution; you can't have equality in distribution, but you can have a fairer model.  And the distribution of coins via proof of work is the fairest that we have, it's the fairest consensus mechanism we have, because you have to work for the coins; whereas, in a proof-of-stake system, it's less fair, because you don't have to work.

Harry Sudock: Yeah, I think that this goes back to this exogenous versus endogenous.  Bitcoin is a fully exogenous, from inception, ecosystem and I think there's a bit of immaculate conception thing happening for Bitcoin as well, where being the first fully proof of work, fully -- maybe it wasn't decentralised the first day, but progressively decentralised, open network with fair distribution; I think with each subsequent attempt, I think back to Grin was a "fair launch" coin, and so what we found is that simply by not being first, the ability to overtake Bitcoin's decentralisation of coin distribution is not possible.

Peter McCormack: And, I think one of the outputs of this is, we have the merge coming for ETH soon, it is moving to proof of stake.  I think if ETH people really talked about it and thought it through, they would understand and agree that the consensus mechanism of Ethereum and proof of stake is not as fair, it's not as good as proof of work, which means they're probably going to use a different angle to attack Bitcoin, like the Ripple guy recently, which is to make out the Ethereum and proof of stake is energy efficient, whereas Bitcoin isn't.  I think we should just routinely tell these people to eat a dick and fuck off, because I think that's going to be a regular hit.

Harry Sudock: It already has been, it will continue to be.  I will pound the table in every venue that lets me to tell the world, number one that the energy that we consume is positive sum, because it's energy that is not being consumed efficiently or advantageously in markets that we're participating in --

Peter McCormack: Not always, but generally trending that way.

Harry Sudock: Trending that way.

Peter McCormack: If we're going to be fair, there are people who are using other energy, or they're creating energy.

Harry Sudock: 100%.  But there's a reality within energy markets in the US and elsewhere that the mandate, the contractual mandate, of utilities is reliability, redundancy and uptime.  Those are the mandates for the utilities.  So, what does that mean?  They're heavily incentivised to overproduce electricity, regardless of how many customers they have.  So, the ability to generate energy in the US is greater than the average consumption, because we've got to build an entire system designed around the high point.

Peter McCormack: Yeah.  We also covered this, and we'll get Danny to put in the show notes, the previous time we covered it.  Okay, let's move on.  Let's talk about the difficulty adjustment, and I don't know the background to this.  Was this a fluke?

Harry Sudock: No.  The difficulty adjustment is Satoshi's key insight into how Bitcoin was designed.  This is the incredibly critically important piece of Bitcoin's design, game-theoretic design, is that on average, every two weeks --

Peter McCormack: Is it 2048 blocks?

Danny Knowles: No, 2016 blocks.

Harry Sudock: 2016 blocks; I want to say 2040.

Peter McCormack: I was going to say 2048.

Danny Knowles: I'd better check!

Harry Sudock: Every 2016 blocks, the difficult adjustment happens.  What that means is that the amount of hash over the previous period dictates how hard it is to look for new blocks over the next difficulty period.  So, let's say that there's ten computers looking for blocks in period one, and then we get to period two, and five more join the network.  I'm using very basic numbers, so we're at 15.  So, the first 2016, there's no change; for the second 2016, the difficulty adjustment would move up 50% to true up, to continue to have on average ten-minute block times.

So, let's play out why this is so important.  Imagine that we have an incredible new innovation in energy, and we are able to bring on an energy source that is ten times more efficient than what we have today.  I would expect Bitcoin mining to go up ten times, because I'm able to consume ten times more energy for the same cost.  Therefore, I would expect an enormous amount of hash to come onto the network.  The difficulty adjustment ensures that we can't accelerate Bitcoin blocks over time, in any kind of significant and material way.

Peter McCormack: And we don't want to as well.

Harry Sudock: Absolutely not.  We want to have average block times of ten minutes, because that means that the issuance schedule is happening over the time period that we expect it to; it's the internal metronome of the system.

Peter McCormack: By the way, tell me if you already know this question; I only want somebody who doesn't know the answer to answer it, but it was Charlie Lee put out a tweet once and he said, "If a block has been found and nine minutes has passed, how long will it be until the next block is found?"

Danny Knowles: I know the answer.

Peter McCormack: Do you know the answer?  What would you think it would be?  It's always ten minutes.  Did you know that?

Harry Sudock: Yes.  This is if I flip a quarter and it turns up heads, what's the likelihood that my next coin flip is going to be heads?

Peter McCormack: It's the same.

Harry Sudock: It's the same.  So, this is the beautiful innovation that SHA-256 hashing algorithm is, is that it's a purely probabilistic environment.

Peter McCormack: I mean, I obviously said one minute, of course!

Harry Sudock: Because you got a C in physics!

Peter McCormack: Charlie was like, "No, it's ten minutes".  I was like, "But it can't be".  He's like, "No, it is", and then he explained a bunch of mumbo-jumbo and I was like, "Fine, I trust you".  Anyway, where's the ball?!  Okay, so those two create the black hole.

Harry Sudock: Exactly.  And so, in the same way that Moore's law in the 1950s doesn't look like anything super-important is happening, it's just the very beginning of an exponential innovation.

Peter McCormack: Where does the 21 million come into that?  Is that a third thing, or is it they maintain the 21 million?

Harry Sudock: So, this is my opinion, it's not Bitcoin gospel yet.  But because we have proof of work and the difficulty adjustment, and therefore the halvings and therefore the monetary policy, all of that happens downstream.  If you don't solve for those first two elegant design problems, you don't get to enforce the monetary policy.

Peter McCormack: I'm just working this one through.  If you don't have the difficulty adjustment, you can still enforce the 21 million, but it might happen quicker.  I still think you get to maintain it.

Harry Sudock: You'd be able to say, "I'm not willing to utilise it", but I think the monetary policy is an arbitrary innovation.  These are fundamental innovations.

Peter McCormack: Fine, okay, I'll work with you.  But the black hole still requires -- it doesn't require 21 million, it requires a fixed --

Harry Sudock: It requires a hard cap.

Peter McCormack: Yeah, it requires a hard cap, because that changes the dynamics of money that we have right now.

Harry Sudock: And in all time in history.

Peter McCormack: Yes.  And the features you get from Bitcoin are the reason Bitcoin becomes the best form of money.  I mean, didn't you say the other night though, "It's not money"?

Harry Sudock: Bitcoin is software fundamentally, in the same way that gold is not money; gold is an element, gold is chemistry.

Peter McCormack: Okay, but where does money come into this?

Harry Sudock: Money is the humanness that is applied to the software.

Peter McCormack: Fine.  I think the 21 million hard cap is important for it to be the black hole as well, to get to the singularity, going back to my interview with Jeff Booth, in that when you have the opportunity to control the spigot to print money, you distort money, therefore you distort markets, therefore you distort people's earning potential, you distort their purchasing power, you distort their decisions.  Everything gets distorted.

Harry Sudock: Yes.

Peter McCormack: Whereas, with a fixed cap and a fixed issuance, everyone knows the rules and everyone plays the rules.  It goes from top-down to bottom-up.  Top-down, bunch of guys in a room trying to make a decision that has this kind of butterfly effect for everybody else; bottom-up, you know the rules, it's how you choose to navigate them.

Harry Sudock: I totally agree.  I think the butterfly effect is the right way to think about fiat first, which is that we don't understand -- Janet Yellen came out yesterday and said, "Didn't really get it, sorry, missed this one".

Peter McCormack: Yeah, "Thanks for paying me $250,000 to come and speak at every dinner, but I don't know what the fuck I'm talking about".

Harry Sudock: Correct.

Peter McCormack: Whereas, every bitcoiner for the last two years has been saying, "If you increase the money supply, we're going to get inflation".

Harry Sudock: Of course.

Peter McCormack: Is she stupid or a liar?  Either way, she shouldn't be in her job.

Harry Sudock: But either way, that job is the problem; she's not the problem.  The fact that we have a Treasury Secretary who has the levers of power that are so large and all-encompassing is the problem.  I think that I'm reluctant to say that the bureaucrats are bad; I'm very willing to say the bureaucracy is bad.

Peter McCormack: Yeah, fair.

Harry Sudock: So, this is the problem with having -- to me, it's like a total false sense of control.  We think that the economists, if they just tweak this little lever, the economy will work again.  The economy is not a combustion engine where you change a fan belt and it starts or stops.  The economy is a large, complex, multivariant, emergent social phenomenon.  And because of that, when you poke one side of the bear, you don't know how it's going to react, and it's an incredibly volatile and incredibly complex place to try and play God.  And so, the best choice is not to do it.

Peter McCormack: So, is it a neutron star that explodes that creates a black hole, and then it collapses in on itself?  So, that creates the black hole, our rabbit hole; essentially Satoshi releasing the protocol created the black hole, and it's a small black hole that Hal discovered, and then a few others discovered.

Harry Sudock: Yeah.

Peter McCormack: But the black hole, for me, it has its event horizon; most people when they cross that, they don't leave.  You're in, I'm in, Danny's in, Jeremy's in, we're in.  But we have to cross the event horizon, and I think we kind of skirt around the edge of it a little bit to begin with, but we see the black hole and we're like, "I'm not going to go near that shit, don't know what the fuck that's all about".

Harry Sudock: Yeah, and I think we can extend the metaphor pretty far and say that let's just say that we're on Earth and we've got a telescope and we're looking up at the sky.  We don't see the black hole at first, all we see is an absence.  And we go through this astronomy phase where we're comfortable where we are, we're looking up, we're curious, we're not sure what's out there, and the black hole is not the obvious point.  You go and you look at the brightest star, you go and look at the nearest planet, you go and look at all these other things that are very apparent to the naked eye; and at the beginning, the black hole is just an absence.

Then the absence gets very interesting over time, and you've got to keep looking, but you've got to engage with this new behaviour, which is looking up at the sky, which is thinking about what does it mean to be an owner of my financial future; what does it mean to think about my time and think about my life in a critical way that lets me have a better outcome?  And maybe that starts with me saying, "The best thing I can do is invest in the S&P 500 in my 401(K)".  That's the baby step that is sane and rational and validated through my social environment and supported by my employer, and it's a way for me to take ownership of my future, because one day I want to retire.  So, you look up and you see Mars.

But over there, further away, is the absence in the sky; and over time, some people will get pulled to that place that isn't the easy, close, bright one, it's the further less obvious absence that ends up becoming the most important force of nature in the broader universe.

Peter McCormack: I like the idea of the singularity as well, because in my mind, Bitcoin eats everything eventually, and we're seeing that.  I've talked about on the show a lot, we have our Bitcoin -- I'm going to end up quoting Donald Rumsfeld here, but we have known knowns, our known unknowns and our unknown unknowns!

So, our known knowns right now are, it's the best form of money, it's a 21 million hard cap, it's censorship resistant, it's permissionless; no one can fuck with my Bitcoin.  My known knowns, I can learn that very early on.  It's the unknown unknowns.  The first, most important one for me, is everything that's happening with mining, everything we've talked about in our previous shows, what they're doing down at ERCOT, what's happening with you talking about giving the ability to build out energy infrastructure, because miners can take off the excess load.  It's the ability to use gas flaring to protect the environment.

Again, I'm going to have to refer back to Hal.  Apart from Hal tweeting out 12 years ago, "I wonder what Bitcoin mining can do for the environment?" which is fucking weird, man!

Harry Sudock: Time traveller.

Peter McCormack: Time traveller.  Apart from that, generally speaking, four years ago nobody was talking about this shit.  I didn't hear it, and now it's all happening, and there's going to be other things like that.  That's the unknown unknowns.  But the singularity is at the point where it's eaten everything.  It's eaten every industry, it's the Bitcoin standard, Bitcoin is the unit of account for everything.

Harry Sudock: Yeah, I think that is certainly the potential that it has for all of us.  And, I'm always hesitant to try to explain how a big system is going to behave.  I'm not a macro guy, I'm just one person making their own decisions day in, day out.  So, the questions I ask myself around this are, "What else would I rather own?  What else would I rather be using?"  I'm very hesitant to say that there's anything else that I'm interested in owning, other than working hard on the business and being exposed to the business, and also owning Bitcoin

The reason being is that, we're going through -- and when we talk about the black hole, I think about the expansion of the black hole as the monetisation event of the asset, and that we are going through this period of time where many other things are going to get demonetised and Bitcoin is going to get fully monetised.  What I mean by that is that right now, a bunch of these other asset classes are getting a monetary premium assigned to them, because global inflation is so insidious and so broad and so large.  And so, it's better to own your house than it is to hold cash; or, it's better to own bonds or stocks than it is to hold cash.

If you look historically, that's not really how mature, harder-moneyed economies functioned.  And we're going to get the pushback and say, "Well, but this economy's so much better than every other economy in human history", and we can debate that.  But I think that what's important to understand is that the monetary premium that's been spread across all of these other asset classes is going to get pulled into Bitcoin over some period of reasonable time, and it's just because -- imagine that you have a newborn today and you want to save for their college education.  What do you recommend buying for the next 18 years before that newborn is ready to go off to college?

Peter McCormack: I mean, it depends on the person!  I mean, I know what I would do, but I know what I'd advise my brother, and it's slightly different things.  What I would do, I'm a bitcoiner, I'd just fucking buy Bitcoin.  I know in 18 years, I don't have to put as much by.  Say you have to save $200,000 for college education, you've actually got to save more, because in 18 years' time, if you have continual debasement of 2% to 5% a year, I don't know what that works out at; does that work out at $300,000, does it work out at $400,000?  But you're constantly chasing.  Whereas, I know if I put $200,000 of Bitcoin by now, I'm going to have a surplus.

But if it's my brother, I'd probably go, "I don't want to give you the wrong advice in case something goes wrong.  Go a third Bitcoin, go a third gold, go a third cash".  But I know what I'd do.

Harry Sudock: And this is the point, is that what Bitcoin does is it lets individuals extend their time preference horizon with a higher degree of certainty than anything else available to them today. 

Peter McCormack: That's because around the event horizon, we have time dilation.

Harry Sudock: Exactly.  Time plays differently in Bitcoin world than it does in the rest of the world, and that's by design, that's because we have proof of work and the difficulty adjustment allowing for the time dilation to take place as the centre of mass continues to grow.  So, with each additional cycle, each round of expansion of that centre of mass, more of the monetisation across the rest of the world's assets gets pulled in; and the opportunity to pull in the next incremental asset goes up.

Peter McCormack: Collapsing in on themselves into the black hole.  Okay, so what have we swallowed up so far?  First, it was energy you told me the other night, I think.

Harry Sudock: I think that right now, Bitcoin mining represents a fundamentally transformative revenue stream for energy markets that has never been available before.  So, it's a full-blown zero-to-one innovation in power markets.  So, if you were running power markets over the last, I don't know, 30 to 40 years, you've spent all of your time focused on cost management.  Nobody has spent time thinking about the revenue time of their business or innovating on the revenue side.  You've introduced some peak and off-peak concepts into some of these markets, and the goal of that was to get households to run their dryers at night, not during the day.  That was the extent of the innovation there, was to try to slowly nudge people's behaviour, to get them to do their appliance usage overnight.

What that didn't account for was the ability to have fully dispatchable multi-100 MW loads being able to come on and off an energy system, in maybe not quite real-time response, but pretty fucking close.  So, there's this huge, huge change in what does it mean to be a large-scale energy customer, and what does that mean for the markets that those customers are participating in?  So, imagine waking up and figuring out that there's another 20% or 30% revenue in your energy system, without having to invest another dollar of capex.

Peter McCormack: Ground-breaking.

Harry Sudock: Ground-breaking change.  And we haven't seen that get fully priced across the spectrum yet.  So, number one is that Bitcoin is going to buy more energy over the coming decades, and that is going to be an incredible benefit for individuals and for the climate and the environment and all of these things.  Bitcoin mining is an enormous positive sum sector of the economy.

Peter McCormack: Tell me, do you walk into energy companies who have no real, or limited understanding of Bitcoin, sit in front of them, give them a presentation on the subject, and watch their brains kind of explode; have you had those reactions?

Harry Sudock: Over the last three or four years, absolutely.  So, there's one interaction that was great, was we went in and we walked them through how we want to be a customer.  I walk into an energy company; the first thing I tell them is, "I want to be the best customer you've ever had.  I don't want to introduce any strain to the system, I want to buy your least valuable hours, I want to do it really cheaply, but I'm willing to work with you along every other vector other than price.  That's it".

Peter McCormack: And, "You can turn me on and off".

Harry Sudock: "You turn me on, off, up, down, half full, whatever; that's all priceable."

Peter McCormack: I mean, that is the best customer they could possibly ask for.

Harry Sudock: Yes, exactly.

Peter McCormack: I'm trying to think of an analogy for any other industry where you would have such an amazing customer.

Harry Sudock: We try to make it really easy.  Oh, and we don't need all these other things, redundancy, you know.  Imagine Facebook showing up and saying, "We want to build a 100 MW data centre".  That really means 300 MW of infrastructure, because they want full uptime, they want to do it with solar, they want to do all these other -- and it just becomes this total -- oh, and they want to never pay taxes for the next 15 years, because they need to be incentivised because ten other places are competing for them.

Whereas, "We want to go to a community that does not have a customer like us, we want to be the biggest buyer of energy in your market, because nobody else has chosen to go there, because what we don't need to do, we don't need to be 15 feet from the interstate and be on a major shipping hub; we don't need a massive amount of land, we're able to do this on a much smaller footprint than most other businesses; we're able to solve all of these traditional hard-to-manage concepts.  We don't introduce strain, we're not a pain in the ass, we're pretty helpful, we're pretty useful, and we just want to be a benefit to your environment.  This is the point, is that we care so much about price that we're willing to work with you on every single other factor".

Peter McCormack: And is it just, "Can you sign up now, please?"

Harry Sudock: It's a little more complicated than that.

Peter McCormack: Do they feel like they're being tricked or something?

Harry Sudock: That's exactly right.  So, we show up, we walk them through what our power purchase model looks like and how we want to interact with you and they're like, "But can you actually do it?  Does this actually work?"  "Yeah, we can show you operating data.  This isn't a hypothetical thing; this is what is already happening at large scale today, we just want to grow this massively; we being our entire industry".

So, this is an incredibly exciting time, when I think we're seeing some of the large energy project developers starting to get hip to this, we're starting to see utilities understand this.  I think that we're going to wake up in five to ten years, and every single town is going to have Bitcoin mining in it, to some degree, as a load balancer for their energy system.  So, there are two ways to think about it.  We're used to thinking of energy as this scarce resource, when really this scarce resource is our ability to think aggressively about bringing low-cost, reliable and renewable power to individuals.  It's our will to build this; that is the scarce resource, we're not running out of energy.

Peter McCormack: Are there any losers in this, any businesses being destroyed?

Harry Sudock: The challenge that could come from some of this is a timing issue, so the lag between new Bitcoin miners wanting to come to a neighbourhood near you, and the energy infrastructure back end catching up to the increased demand.  So, the miners are more nimble than building a new powerplant.  So, there's going to be some push and some pull, but I think over time that's going to normalise really significantly as we see further commoditisation of mining hardware, we're going to see further growth and cost of capital dropping for some of these mining operations.  So, the ability to have a truly flexible load consumer is going to increase.

So, imagine we fast-forward 20 years; maybe the Bitcoin miners are only running 25% or 30% of the week, just when needed to balance, rather than needing to hit 80% or 90% uptime in order to amortise and pay off those servers; the server costs have come down, the cost of capital's come down, the cost of energy's come down, and so it becomes this totally opportunistic layer of the energy stack, where the revenue that gets put back to the utilities and to the energy generation folks just means that they're able to continuously invest in better and higher quality service, higher environmental stewardship, and they're able to actually have the revenues to improve the systems, rather than wait for government subsidies to come along and save them, or the public dollars needed to upgrade things; they actually have a profitable business that can invest in the improvement of services, rather than some of these other less market-driven solutions.

Peter McCormack: What about with money?  If we had a dollar stablecoin on the Lightning Network, my assumption with that is that becomes a real significant problem for Visa and Mastercard on debit; not so much on credit, because I don't believe we have a decentralised credit on the Lightning Network yet; someone may invent something.  We have some centralised possibilities with some of the entities who work in Bitcoin finance right now.

But stablecoins have become very popular globally, especially in developing markets, mainly operating on alternative protocols.  But if we had a dollar stablecoin on the Lightning Network, and I know Jack Mallers is doing something kind of outside of it, on top of it; but an actual stablecoin natively within the Lightning Network, all those fees which Mastercard and Visa take from the retailers, a percentage, whatever it is, they're destroyed, they're gone.  That will lead to two things: either a lower price for the consumer; or, more revenue for the retailer.  But either way, you've removed that percentage, it doesn't exist anymore.

Harry Sudock: Well, I guess I'm sometimes confused why we make Western Union the boogeyman and not Visa and Mastercard.  What's the difference between 13% or 30% or 3% fees?  It's all rent-seeking extraction.  You're a natural monopoly on these payment processors, you've inserted yourself into the transaction cycle and at the end of the day, the individual's paying the price for that.  So, why would a technology upgrade not fundamentally disrupt you and remove you and strip the cost out of the structure?

Peter McCormack: Yeah.  I mean, look, they've provided a service, a useful service.  It's useful for me coming here to the US that I don't need to exchange money.  On my phone, I can double-click and I can pay.  That is a useful service and there's a charge for that.  I just think they've been out-innovated.

Harry Sudock: Exactly.  And that's the thing; the technology is fundamentally deflationary.

Peter McCormack: It's like the end of Fight Club.  By the way, if anyone listening to this hasn't seen that film, go watch that fucking film.

Harry Sudock: It's really good.

Peter McCormack: But it's the end of Fight Club.  It's the blowing up of the banks; well, the payment processes.

Harry Sudock: The destruction of consumer credit.

Peter McCormack: Well, no it's not, because I still think you have credit.  Consumer credit, I think, is different from debit.  So, debit is just the payment process, but credit is different.  If I don't have credit, sometimes I want to buy things when I don't have it. 

Harry Sudock: All dollars are credit.

Peter McCormack: You know what I mean though, there's a slight difference.  Debit is the money I have to let me pay for something, it's come from my bank account.  Credit is the money I don't have; I'll pay it in at the end of the month, incentivised, which you can game in certain ways.  But what I'm saying is, it at least gets rid of the debit part.

Harry Sudock: Yes.

Peter McCormack: Now hopefully, if you're owning Bitcoin, you won't need credit, because you've been financially responsible.

Harry Sudock: That's the goal, is the removal -- we talked about the butterfly effect.  I think credit cards are a huge contributor to the butterfly effect.  They're incredibly useful in a fiat environment, "You mean, I get to borrow the money for free for 30 days?"  Who wouldn't take that deal?

Peter McCormack: "And you actually pay me now?"

Harry Sudock: Exactly, "And you give me whatever cashback", or all these other programmes.

Peter McCormack: "I get four flights a year for free, just for using your free 30-days credit?"

Harry Sudock: And so, what that says to me is that they're generating revenue somewhere else within the system, looking at the retailer fee that ultimately I'm ending up paying anyway.  And then, the other piece is that there's some significant percentage of folks who don't pay their bill at the end of the month, they borrow it for longer than 30 days, and get charged 14.5% on that money and still pay it back.

Peter McCormack: Or never pay it back, and are stuck in that cycle!

Harry Sudock: That's the other option.

Peter McCormack: What about the destruction of the banks themselves; will I need a bank account in 15 years, 20 years?

Harry Sudock: I don't think you'll need a bank account, but I think the banking services are ultimately just a service.

Peter McCormack: But anyone can provide them; Cash App can provide them.

Harry Sudock: And credit unions have been thriving for a long time.  Local merchant and regional banks, I think the attempt to have banks achieve network effects is really the challenge; and what Bitcoin does is it breaks the banking network effect, it doesn't remove the need for banking services.

Peter McCormack: Yeah.  Interestingly, I haven't used a high street bank now for quite some time, because one, I lost one, the known story of Lloyds closing down my bank account, the motherfuckers; and, you can just download an app and have a bank account and a card available in minutes now.  So, you've got these neobanks, which is the next step forward.  But in terms of what I actually use my neobank for, there are direct debit payments.  But if you move to a Bitcoin wallet, a Bitcoin wallet I can spend money; I wonder if you can get to the point of direct debits.  That's a bit more difficult, I guess, regular payments.

Harry Sudock: Yeah, there's ways to do it.  Ultimately, software just replaces these things over time.  The great part about Bitcoin being a protocol is you can plug it into a bunch of different kinds of software front ends, and the innovation can happen at the software layer, and the protocol can function exactly the way you expect.

Peter McCormack: So, the banks are dying, you just have providers of financial services. 

Harry Sudock: Yes.

Peter McCormack: So, why will we need a central bank then?  We won't then?

Harry Sudock: We won't.  I mean, the central banks have a few core functions.  They tell you that the core function is full employment and stable prices.  That's what they will tell you the dual mandate is, that's what your economic textbook will say to you.  But it also provides other, especially on the dollar side, it provides other services that are related to dollar hegemony, which are things like settlement assurances. 

So, Switzerland's account at the US Fed and England's account at the US Fed, the reason why they feel comfortable doing business with each via the US Fed is because of dollar hegemony in that environment, and the central bank and Fedwire as a facilitating mechanism for settlement, which Bitcoin solves settlement.

Peter McCormack: Can you see a scenario whereby we have a move back to the era of free banking?  I discussed this with Lyn Alden recently, whereby perhaps we have some issuance of some form of currency, which Bitcoin backs?

Harry Sudock: I mean, listen, any free market solution that people want to engage in, I think over time will use Bitcoin to engage in an experiment with.  I think it's a function of adoption, not a function of experimentation.  So, I think we could certainly see attempts to focus on that.  I think we could definitely, if we're able to achieve what I think is in the works, on Lightning and on Taro and on some of these other more expressive Bitcoin-based environments, I think we'll see significant experimentation there, which is exciting, but ultimately may not be the most interesting use of Bitcoin.

Peter McCormack: What about governance and politics and the way we govern ourselves; how do you think that changes?  I've not really heard you talk too much about this.

Harry Sudock: I am firmly in the camp that any economy and any country and any group of loosely organised people are really just the sum of the individuals.  So, I think that the ability for individuals to engage with each other on an opt-in basis is really the foundational component.  So, I think a lot about what we've gotten right in America, and some of what we maybe have gotten wrong.

I think we largely got it right around the First, Second, Third, Fourth, Fifth, Fourteenth Amendment, they're all really, really, critically strong pieces of governance infrastructure.  And layered on top of that, it's very difficult to change.  And so, similar to Bitcoin --

Peter McCormack: Like consensus.

Harry Sudock: Exactly.  So, similar to Bitcoin, the US Government and the framers of the Constitution did an incredible job designing a system that is (a) very strong from its foundational components; and (b) very hard to change.  And so, from a governance standpoint, that means that we've kind of offloaded the next level governance to higher layers of interaction.  So, maybe that's a local or a state constitution that gets amended or that gets changed more easily, because maybe there's a more homogenous population from an ideological perspective, in a state or in a community; but also, it means that the judicial system holds a really significant lever over how the hard-to-change things get interpreted.  We're seeing a lot of that more recently.

So, these layers of foundational components and difficulty to move them is really at the heart of why the American system is thought of so highly and has been so successful to date.  If you look at the places where we've had challenges, it's really around the interpretation layers, it's not around the fundamental layers.

Peter McCormack: Yeah, correct me if I'm wrong here; I've read the Constitution through once, I've not really read all the federalist papers.  I mentioned to you the other day, I've got them open, I'm about to start on them.  Do they address the size of the state in that, because this appears to me to be the biggest problem, that the state's grown so fucking big?  Who was it yesterday, was it Peter Doyle who said, "40% of the --"

Danny Knowles: Yeah, let me pull it up.

Peter McCormack: Yeah, it was something like, "40% of all tax dollars go towards funding the state" or --

Danny Knowles: Yeah, "The spending-to-GDP ratio is 40%".

Harry Sudock: So, this is the fundamental problem with GDP, the calculation.

Peter McCormack: Sorry, just go back one step.  I think I remember Jameson Lopp tweeting something once, when tax was first introduced, and it was a 1% taxation.  I can't remember what for, but I remember the introduction of it, him showing that introduction.  You're now at a point where the state has grown and grown.  I don't know if this is something they didn't consider, or they considered, but it seems to be the size of the state is one bit that's been missing from the Constitution.  That might have been helpful.

Harry Sudock: Yeah.  I think we just don't have a lot of evidence that the government is that good at solving many of these problems, and I think it's the classic meme of, "I'm new to Bitcoin and I'm here to fix it".  I think that's how the government shows up to most things, "I'm new to this new thing, I'm here to fix it for you.  We're going to regulate it and then it's going to be great" or, "We're going to tax it and now everything's going to be great", and I just don't think we have a lot of evidence that that's what happens.

I think that there are two insidious forces at work: one is that the government capital, the federal government, or the state governments to some degree as well, once they get power, they don't give it back.  What percentage of Americans think that the Patriot Act was a great idea today?  It's not that many, but that's never going away.  Those surveillance capabilities, those privacy protections are gone, and it's going to take a long time to approximate getting them back.  And the way that we'll get them back is through asymmetric cryptography, not through the government giving us permission to have our privacy back.  So, there's this creep component to it.

But then, the other is that -- well, there's three, I guess.  The second is that the government is very bad as a capital allocator.  So, a dollar that the government spends doesn't go nearly as far as the dollar that private enterprise spends.

Peter McCormack: Because it lacks competition?

Harry Sudock: There's lots of structural reasons.

Peter McCormack: It employs morons?!

Harry Sudock: Yeah, so there's a talent problem, there's a competition problem, there's an incentive problem.

Peter McCormack: Accountability problem.

Harry Sudock: Well, let's say Congress is going to go sign a $1 trillion spending bill, and there's government contracts that are a part of that.  There's an intense competition state-by-state, vote-by-vote, to get that contract allocated to your state, regardless of the quality of the product, and regardless of the pricing mechanism.  There's a huge incentive for a representative or a congressperson or a senator to have the government contract awarded to a business in their state, so they can maintain their ability to get re-elected.  So, the incentive structure is just immediately broken. 

So, we need to go to some kind of blind bidding system, or something more reasonable from a capital allocation perspective, not just, "Hey, I don't care the quality of the product, you need to aware this contract to my state or I'm not going to vote for it".  And, when you need a simple majority to pass something, the practice of buying votes with the allocation of pork in the barrel becomes the guiding principle, rather than delivering the best outcome for the American people.

Peter McCormack: So, perhaps with Bitcoin, it's a forcing function for the state to become better capital allocators?

Harry Sudock: Bitcoin is just a de facto austerity measure.  So, if you can't print more of it, you don't get to play games with the money.

Peter McCormack: People who are holders of Bitcoin right now are paying tax on their Bitcoin; not everyone, I assume, but plenty of people are, and I don't see that being eliminated for now.  So, there becomes a scenario where potentially there's a transition where the dollar dies, the government is getting tax receipts in Bitcoin, but their ability to grow the state or fund state operations is becoming limited, because the dollar's dying, they can't print it; but they do have this Bitcoin.  So then, they have to allocate it and they have to budget.

Harry Sudock: Exactly.

Peter McCormack: And they can't tax too high, because if you tax too high, people will move jurisdiction, so it is a forced austerity.

Harry Sudock: And we can look at the natural example in France recently, where they introduced that millionaire's tax.  70% of the people left the jurisdiction!  This idea that people don't really vote with their feet; give them a good enough reason to and they will.

Peter McCormack: Of course.

Harry Sudock: I don't take the direct approach that I think the dollar is doomed and Bitcoin is here to eat the dollar overnight.  I think that moving towards a harder monetary system over time is a valuable way to engage with this stuff, and that fundamentally this is just a technology improvement around how individuals can relate to each other on an opt-in basis.  So, over time, I'm just going to continue to vote with my paycheque and say, "I don't want dollars, I'd rather have Bitcoin", and I think that's the mechanism by which a peaceful and prosperous transition can happen.  It's just more people own stocks than own dollars today, and so I think in the future we just see the same dynamic, where more people own Bitcoin than dollars today, and eventually that change can happen.

But it's not like we've got this thousand-year history of a single currency governing the world.  We've got monetary transitions and reserve currency transitions time and time again that we can point to, and some of them come with incredible unlocking of innovation and opportunity, and some of them come with challenges to the country of origin from the prior regime.  And so, it's a fluid and dynamic process that I think we're in this really exciting moment of a monetisation event in a new asset.

Peter McCormack: Some dinner you missed, by the way, Danny.

Danny Knowles: It sounds like it!

Peter McCormack: Danny, anything you want to ask?

Danny Knowles: The only thing I was thinking, so whenever we speak to anyone on macro stuff, they say this next decade's going to be high energy prices.  What impact will that have on mining?

Harry Sudock: Yeah, I think that energy markets are definitely something that miners think broadly about and are exposed to.  I think, like most things, the harder the environment, the more innovation gets rewarded.  So, the ability to bring more flexible and aggressive business models to market, the ability to have vertical integration available, I think the folks who have low cost of capital and scale are probably going to be disproportionately rewarded in a more challenging market environment, because they're able to drive down the marginal costs, they're able to be not just miners, but capital allocators, within the context of these markets.

So, I think that it's going to reward the -- it's a barbell; it's going to reward the scale players, the large ones, who are able to strike economies-of-scale-driven deals and creative inflexibility.  It's also going to reward the very small guys who are able to find innovations that don't scale.  So, maybe it's the flared gas guys, maybe it's the ability to buy a distressed well head, or maybe it's the ability to enter into an unusual situation that doesn't grow to 5 MW or 10 MW or 100 MW, but for 1 MW or 2 MW, that's a nice, small business.

Danny Knowles: Interesting.

Peter McCormack: I'm looking forward to whatever the next unknown unknown is.  I'm intrigued to see what we eat next.  Do you want to tell anyone anything about Griid before we…?

Harry Sudock: We're Griid, we mine Bitcoin, I'm Harry from Griid!

Peter McCormack: And the most beautiful voice in Bitcoin!

Harry Sudock: As long as you keep letting me talk, I'll keep talking.  I have to say, my mum loves your show.

Peter McCormack: I love your mother and I appreciate her being a fan of the show!  I seem to have a few mothers who like the show.  Who was it, Dylan LeClair's mum?

Danny Knowles: Yeah.

Peter McCormack: She likes the show.  Somebody's 94-year-old mother found the show on Facebook, or grandmother, told them, "I've found this Bitcoin show".  It's like, "Yeah, it's my buddy".  I can't remember who that was.  What Bitcoin Did is the favourite podcast of Bitcoin mothers around the world.

Harry Sudock: The most important demographic.

Peter McCormack: Yeah.  Man, I love you!

Harry Sudock: I love you too!

Peter McCormack: Harry, thank you so much.  How do people follow you?

Harry Sudock: On Twitter, @harry_sudock.  My DMs are open, I accept resumés.  Just keep working on Bitcoin.

Peter McCormack: Someone needs to take this idea and run with it.  It feels like a Tomer…

Danny Knowles: It does feel like a Tomer article.

Peter McCormack: Yeah, it feels like a Tomer article.  I'm going to forward this on to him, see if he wants to -- he did the Bitcoin Brain.

Harry Sudock: So, I'll say it, Gigi is my Bitcoin big brain spirit animal and all of this.  I think he's so brilliant, and I think he's such an important thinker.  Him and Allen Farrington on Bitcoin is Venice, those are the two people who, when they write stuff, I cancel meetings to go read it.

Peter McCormack: I'm with you on both of those.  All right, dude, keep crushing.  Hopefully I'll see you soon, man.  I'm not sure when, not sure where.

Harry Sudock: Enjoy Nashville.

Peter McCormack: Yes, brother.  Can you come with us?

Harry Sudock: I wish.  I'm in Austin next week. 

Peter McCormack: Can you come on the way?

Harry Sudock: We'll talk about it.

Peter McCormack: Okay!  All right, take care, brother.

Harry Sudock: Thanks.