WBD618 Audio Transcription

The Future of Bitcoin Mining & Security with Sam Wouters

Release date: Monday 13th February

Note: the following is a transcription of my interview with Sam Wouters. 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.

Sam Wouters is a Research Analyst at River Financial. In this interview, we discuss Bitcoin’s hash rate: what it is, the factors affecting its growth, what this means for Bitcoin’s security budget, and what this means for Bitcoin’s energy needs. In short, there is a symbiotic relationship between expanding Bitcoin’s real-world utility and securing the blockchain.

“We honestly just don’t know how much we actually need to fend off all of these potential attacks…it’s kind of like with physical security: you could spend $100,000 every month on physical security and someone might still figure out a way to kill you. It’s just a tricky thing with security in general. This is absolutely not unique to Bitcoin. It’s just insanely difficult to model for.”

— Sam Wouters

Interview Transcription

Peter McCormack: Sam, how are you, man?

Sam Wouters: I'm good, thank you for having me.

Peter McCormack: Thank you for coming on.  Welcome to What Bitcoin Did.

Sam Wouters: Thank you, it's an honour to be here.

Peter McCormack: It's an honour to have you.  So, I have not read the entirety of the report because it's long; it is a monster!  But we will include it in the show notes and let everybody read it.  Danny's been through it in detail and he's briefed me, but before we get into this, let's introduce you to the audience, tell them about yourself, where you work, what you do, what your favourite What Bitcoin Did show is, do you support Real Bedford?

Sam Wouters: I do, I was one of the pre-orders of a shirt and I've been following it's course all along.

Peter McCormack: Legend.

Sam Wouters: It's been exciting to watch.  Yeah, I'm Sam, I'm a Bitcoin research analyst at River Financial, which is a US-based Bitcoin-focused company.  My back story into Bitcoin is also I think somewhat unusual.  So, the short version of it is me getting schooled on hyperinflation by Venezuelan people when I was a teenager.  So, I can dive into that a bit more if you're curious.

Peter McCormack: Yeah, I mean did you go to Venezuela?

Sam Wouters: No, so this was through an online game that I played.  I started playing it when I was 12 years old just together with friends, and eventually all of them moved on.  But this game had an economy in it, just like any other economy, I guess, which is also what I realised later on, like actually I know more about economics than I realised.  But I would trade on this game, that's why I stuck around, and I realised I don't think I'm great at a lot of things, but that is something that I was actually quite good at to the extent where I could earn money from it, because the money you earned in the game, you could exchange for real-life money. 

So, that's one of the two ways I got in touch with Bitcoin for the first time, where these people who would buy and sell this currency for real-life currency, they needed a payment method to be able to do this, and it's always problematic with PayPal, with credit cards, with bank transfers because you're buying a virtual good and there's actually no proof that you have anything, there's no package delivered at your door or anything.  So, lots of people would use chargebacks to get their money back and there was lots of fraud in there.  Alternatives were things like Western Union but that's, as everyone knows, really expensive.

Bitcoin started popping up there for the first time as something you could use to exchange the money that you had in the game for real-life money.  So, that's when I first started seeing it, and I was trading like crazy on this game trying to earn money, but the economy in the game started to tank because lots of people were setting up these really large bot farms, so they would just run thousands and thousands of accounts that were gathering resources in the game, to then try to sell it for like $10 a day, $20 a day to make money.

After a while, I started realising, this is actually devaluing.  I'm trying to trade and make as much profit as I can, but this is devaluing what I'm trying to earn.  So, some early lessons as a teenager on how money and economies work.  But then I started wondering, "Who are these people?  Are they just people like me but they're just smarter setting this up at home?"  Then at some point, I started asking around and trying to figure out, "Who are these people?"  And apparently, quite a lot of them were Venezuelans because for them, earning $10 a day is life-changing money, because many of them typically earn significantly less.

That's when I really started diving into, okay, why are they making so little money; how does that work; why is that so different from western Europe where I'm from?  That really started to get me into just learning more about economics in general.

Peter McCormack: When was this?

Sam Wouters: So this is basically from when I was 16 to 22-ish, or so.  I'm 30 now, so this has been eight years or so ago when I just went through that whole journey and first got into Bitcoin.  So, I've been into Bitcoin, I guess it's ten years since this year.

Peter McCormack: Wow, so you were pretty early?

Sam Wouters: Yeah, relatively.  I feel like I was always going to find out about it because me playing that game was a result of moving to an area where I was, let's say, less welcome by my peers.  I moved from The Netherlands to Belgium when I was a teenager and you just have a different accent.  It's like in the UK, if you're from one city or another, people look at you weird.  So, I just spent a lot of time by myself, spent more time gaming as a result, and yeah, I was always going to play that game because everyone my age played it at the time.

Peter McCormack: What was the game called?

Sam Wouters: It was called RuneScape.  So you had World of Warcraft, everyone knows that one.  It was the biggest one and this was the second biggest MMO like that.  So, that's the one I played and I was probably always going to play it because all of my friends played it and I just stuck around for the economic thing.  Then when I got into Bitcoin, I actually realised that pretty much everything I was seeing there was stuff I had already experienced as a teenager in the game, people just trying to invent other currencies, so to speak, trying to make other things really valuable.  All of the scams, all of the pyramid schemes, all of the pump and dumps, the manipulation, I'd literally seen all of it.

Then, when I got into Bitcoin I was like, "Hold on, how is this possible that it works the exact same way here?  Surely these people are way more sophisticated", me as a naïve teenager just not really realising how these are also just people, but I just had this kind of inherent belief that people who are really into these financial assets, they must be far more sophisticated.  But apparently, that wasn't really the case.

Peter McCormack: A scammer's going to scam!

Sam Wouters: Yeah, for sure.

Peter McCormack: Okay, I mean I've been to Venezuela.

Sam Wouters: Yeah, so I've heard.

Peter McCormack: It's a very interesting place and a very cool place in terms of the people and the food.  Despite everything they're living through, people are great.  But I saw some of the really weird shit that goes on, being in a hotel and asking for a beer and it's a tiny, little bottle.  I mean, I don't know if you've had this, but we're experiencing shrinkflation quite significantly in the UK at the moment, I'm noticing it with a lot of things.  It could be a milkshake that my kids used to get that's significantly smaller, or packs of crisps or sweets, or anything you get from the supermarket.

Sam Wouters: Yeah, especially from the supermarket, they just change the amount and a lot of people never notice.

Peter McCormack: They don't notice.  But the way I saw it in Venezuela was crazy.  The beer I got was tiny, it was this tiny, weird little bottle, the same with bottles of water.  But lots of other things, like in the airport bathrooms, there was no soap to wash your hands, which you would expect at any airport, but that didn't exist.  On the way out, I saw the other side.  I went to buy a pack of M&Ms and it was like $6 for a pack of M&Ms, it was crazy, weird stuff. 

But the way we experience inflation in the UK, Holland, Belgium, US, I know it's been high this year, but generally it's quite insidious, it's slow and it tricks you.

Sam Wouters: It really is.

Peter McCormack: In a place like Venezuela, no, it just fucks you.

Sam Wouters: Yeah, absolutely.

Peter McCormack: Okay, so we're going to talk about hashing, which we've not really touched on in the 600 episodes we've made, in detail like I think we will today.  I think this subject's going to be really interesting, because we've had a lot of people coming on the show talking about different things they want to use mining for, some environmental things, for example landfill, using it on landfill sites to flare off the methane, or people talking about using it to stabilise grids. 

I've always had this thing in the back of my mind, I've talked about it with Danny a few times, I've always had this thing where, is there enough hashing available to support all these ideas?  I just don't believe there are.  So I was always like, "All these ideas are great, but if the network doesn't demand enough hash to support them, what actually happens?"  And do you know, if there's, for whatever reason, a drop in price and therefore a drop in the demand for hashrate, what actually happens to these projects where we've attempted to stabilise grids; does it go offline?

So, there's lots of things like that, I've had this curiosity in the back of my mind; and then when Danny put this in front of me, I was like, "Maybe Sam can answer this".

Sam Wouters: Yeah, a little bit, I guess, because a lot of the things you've mentioned, I've been a long-time listener of the show and I've heard all of these episodes, with Adam Wright, with Troy Cross, etc, with Shaun Connell, who I also asked to review the report, and Daniel Batten as well, who does a lot of the methane analysis.  And it's a really good point that you raise, and this is also one of the conclusions in the report.  All these things are really cool, but mining's just not big enough to do all of it, as excited as people are about it.

That's not necessarily a bad thing, because I'm of the opinion that every bit helps.  There's lots of different initiatives and it's an interesting marketplace of ideas, and some of them will get a lot of traction and others will just turn out to be less interesting and get competed out of the market.  It's a bit of a pity for people who are very passionate about trying to integrate these systems and make it work, but that's just the reality of how hypercompetitive mining is in general, I suppose.

I do see there's a lot of debate around, okay, mining uses a lot of energy and then we can create this narrative around it of, we can use a lot of these kinds of mechanisms to, "justify" is not the right word, but to make it more accessible to people who think it's really wasteful; but instead, we can actually make it less wasteful to just the environment in general, and it's a tricky subject.  It's tricky to get people over that hump, because they need to learn a lot about how energy works in general, similar to how people say with Bitcoin, you need to learn how finance works, how money works if you really want to understand a lot about Bitcoin too.  And then in a similar way with mining, this is a whole debate around how all of these use cases, they sound really cool, but how do we actually get this working in practice.

I try to have a very pragmatic approach to all of it and just make it very tangible for people, because otherwise it just stays at this high level like, "Yeah, eventually we'll have this transition where all of the mining's going to be these cool types of projects", but if you're just coming into the space and you're just hearing, "Yeah, we're going to do all this crazy stuff with mining in the future", it just raises tons of questions, just wondering how realistic is this.  It sounds really fascinating, but especially if you've been a listener of the show, I think, and you hear about all of these cool initiatives, how feasible is it that in 10, 20 years' time, we'll actually see that the sizeable portion of all of the mining uses these types of methods and we're just totally transitioning in that direction?

They sound like really cool ideas, like the OTEC stuff as well, it's fascinating.  But you're also of the perspective it's also intimidating.  These are long projects to convince people to get this up and running, for them to start using it for all the economics to work out as well.  I think there's tons of work that needs to be done there because, as your original question, I guess, how is this going to be financially feasible; is there enough hashrate out there to make all this stuff work?  And if everyone from their separate angles maps this out as, "Oh, if we do OTEC mining, then the economics will work out", and at the same time the Methane guys are like, "Yeah, if we do methane-based mining, then all of it will work out", and then maybe all of them find each other in the middle in, let's say 20 years' time from there and they're like, "We didn't necessarily keep all of your ambitions in mind either", so there's only so much for everyone.

Peter McCormack: Yeah, there's this big, important dependent, which is what is happening with Bitcoin price, issuance rate.

Sam Wouters: Yeah, absolutely.

Peter McCormack: Well, let's get into it.  So, I mean you said you're a regular listener to the show, so the next question is probably to be expected, but if we're going to be discussing this, we should have you explain what hashing is, that component of mining, just for anyone who doesn't understand; explain what hashing is and how it works.

Sam Wouters: Yeah, sure, it's important to do.  I also have this in the report, a little section on it, because for a lot of people, mining is just -- the explanation you hear most frequently is, "Mining is this way of doing complex calculations to process transactions on the blockchain".  That's like a lazy explanation, because it's easy, it's very accessible like, okay, complex calculations.  But essentially, what hashing is, it's taking a string of data and transforming it.  It could be anything, the data; it could be all of our names put together; it could be every street name in the city put together; it can be anything you can imagine, but you use an algorithm that transforms it in a one-way street essentially to a fixed string of letters and numbers.  This is a form of cryptography.

The other more well-known form of cryptography that is related to it is encryption.  So, encryption, it's two-way.  You can encrypt something, give someone the key to decrypt is, and then they can figure out what the original message was.  But in hashing, you can't do that kind of transformation back, you can only just put in the data and then you get that fixed string of information out.

So, what the Bitcoin protocol does, in essence, it tells the network, "I want someone, anyone who is mining out there, I want you to figure out a hash that matches this sort of difficulty", which the Bitcoin protocol sets based on how many people are participating.  And then everyone starts searching like crazy, and I say everyone, but it's good for non-technical people to imagine these are just computers that these people operate, they're just trying to search for that sort of winning lottery ticket.  And then, the first one to find it, they create a block, they broadcast that to the network, and then everyone in the network can verify, is this actually correct; did they find the correct hash?  If that's the case, then that block gets added to the blockchain and it is synchronised all around the world.

So, hashing is, in essence, it's a way to help coordinate the entire network to find a specific hash that meets a certain difficulty set by the system, and that difficult ensures that even if half of the miners disappear over the course of the next year, or if the number of miners triples over the next year, then on average, it will ensure that the Bitcoin Network is always pretty stable.  So, every roughly ten minutes, there will be a new block of transactions, and it makes the system very predictable.  So, it automatically adjusts that difficulty to account for that.

It's really important for people to keep in mind that we don't have more miners in Bitcoin to process more transactions; that is not the point, and there's very often in the mainstream media these misconceptions around, "The amount of energy keeps increasing and if everyone in the world would use Bitcoin today and we just extrapolate that number out, then it's going to use up all the energy in the world", and it's just total nonsense.  That's a complete misunderstanding of how it works.  All the extra miners do is raise the total security level of the entire history of the blockchain.

These miners, they're not even really processing transactions, it's not like you're paying someone with a card and then that terminal is processing a transaction.  Whenever you add a block to the Bitcoin blockchain, you're also simultaneously securing the entire history.  So, people mix up, like the journalists, if you can call them that in that context, they will often mix up the two and say, "If you're doing a payment on Bitcoin, then essentially this is the energy cost that was involved in that", but no, there's a security cost involved as well, and those two things are mixed together.  But even understanding that, that takes a bit of time for the average person to get.

Peter McCormack: And why this method of hashing for securing the network, why was that a good design option?

Sam Wouters: From my perspective, it's because it's so predictable, because hashing has been around for a long time.  I think one of the most well-known examples that it's used for is passwords.  A lot of people don't actually realise this, but when you enter a password into a service, your computer will hash the password and then it sends the hashed version of it to the server of the application or the website, or whatever it is that you're using, and they will check, "Does this hash match the one that we initially put into our database?"  If that's the case, then you can log in. 

If that's not the case, then they don't know exactly what password you put in, because then they could figure out, "Okay, can we hack some of your other accounts then?"  So, hashing in general has just been around for a long time, and this is also something you hear often in Bitcoin, "Don't roll your own cryptography", they often say, "Don't try to invent your own constructions that have never been tested", so this is not something that's novel to Bitcoin in any way, it's just a way of using hashing as a tool to coordinate the entire network.  It's rather lightweight, it's very easy to verify if a hash is correct or not; it's just so difficult to reverse-engineer it, like pretty much impossible for a good hashing algorithm today.

Peter McCormack: Okay.  Danny, do you have a chart for the hash history?

Danny Knowles: Yes.

Peter McCormack: Let's take a look at the history of the hashrate.

Sam Wouters: Yeah, you mentioned it's a long report, and indeed I tried to put in lots of graphs and images to make it a bit more tangible for people who just like to scroll through and see what's going on here.

Peter McCormack: How long did it take you to do it?

Sam Wouters: The total report was about one-and-half months.  Yeah, that just shows over the past years, it's been growing like crazy in general.  So, this one, it's a logarithmic graph, because it kind of shows the different eras of mining that we've gone through where initially, in early years, 2009 at the bottom left of the graph, that's where mining started and it was just with CPUs and computers.  But then very quickly, people started figuring out, "If we use graphics cards, then we can mine a lot faster".  There was this brief period of the FPGA miner, and then ASICs started emerging in 2013.

But then, you're really just at the terahash per second level, so that's 1 trillion hashes per second, so that's good to put into context what I was talking about with those hashes.  Essentially today, the Bitcoin Network is doing 250, what is that now, I think we're talking quintillion hashes per second, I believe it is, so just incomprehensibly large numbers.

Peter McCormack: It's insane!

Sam Wouters: But that's what they're doing.  Every single second, there's so many calculations being done to try to find that lucky number for the lottery.

Peter McCormack: And these megahash, gigahash, terahash, petahash, exahash, zettahash, where do these names come from; is this a Bitcoin thing?

Sam Wouters: No, it's not a Bitcoin thing.  So, I've got an overview of it here as well, so this is just using computing in general, because you have your gigabytes of storage, but in terms of storage we never really got past terahashes so far for consumer purposes.

Peter McCormack: Oh, terabytes, petabytes, exabytes.

Sam Wouters: But I'm guessing datacentres at Google and Amazon and stuff, they might be looking at some of the bigger ones in there.

Peter McCormack: What's after zetta?

Sam Wouters: I thought you might ask!  Apparently yotta, and I don't believe there's anything bigger on the scale, that I've seen anyway, but that might be wrong.

Peter McCormack: Who gets to come up with a new name?

Sam Wouters: I have no clue. 

Peter McCormack: The Hash Council!

Sam Wouters: What would you call the next one?

Peter McCormack: I would call the next one the jezzahash; we'll go with the jezzahash!  I don't know, Danny, what do you think?

Danny Knowles: Pete's hash is already taken, isn't it?

Peter McCormack: Goodhash, Dannyhash?!  Okay, cool.  So, your report, you're talking about us looking to reach zettahash, you see this as a goal.  Why is this important?

Sam Wouters: So actually, to correct that, I don't necessarily see it as a goal.  I tried to look at the future of mining and that was an interesting goalpost to look at.  You could say, "What does mining look like in 10 years or 20 years?" but some people would call that fiat thinking, I suppose.  But it's just looking at it from a different perspective of, what do we look at in Bitcoin's terms, or what is commonly named by the mining industry.  So, a zettahash is then the next point in time, and then you can look at how long is it going to take to reach that; is it at all feasible to reach it? 

I definitely mention in the report, we don't need to reach it.  I think if Bitcoin doesn't reach a zettahash, that is not a bad thing, it doesn't mean Bitcoin failed by any means.  It's just a way of looking at the future and figuring out, what might the mining industry look like at that point, and there's lots of things you can keep in mind there. 

So, in this graph that Danny is sharing, I've kind of plotted out, like if you take mining from when it became pretty serious, when you started getting a lot more ASICs that were quite efficient, so that's in 2016 or so, then if you plot out the growth rates since those years, then you start seeing, if we would grow at the rate we have since 2016, then we would reach a zettahash, if we kept up that rate, by like 2046 here you can see on the graph.  But every year, that rate of growth has been speeding up, other than 2020, which was a bit of an outlier there.  But every year, it's been getting faster.

If you look at the 2022 rate, if we keep growing the way the hashrate has grown in 2022, then we reach a zettahash around 2033 or so, which is significantly earlier than some of the earlier rates that were projected.

Peter McCormack: And what kind of percentage increase is a zettahash from now?

Sam Wouters: That's a good question.  Currently, we're hovering around 250 to 300 exahash.

Peter McCormack: Okay, so about 4X.

Sam Wouters: So basically times four, indeed.  And that doesn't sound so far off because in general, a lot of Bitcoin is about exponentials, people expect really big growth.  But there are reasons to believe why, I think the graph you shared earlier with all the numbers, Danny, that showed every one-and-a-half to two years, we went to that next order of magnitude.  Yeah, on this one.  But this last jump, that's probably going to take a bit longer.  It could be a decade, it could be two decades.  It could also be in a couple of years from now if, like you mentioned earlier, what if the Bitcoin price pumps like crazy and everyone jumps back on mining, then we could reach it significantly earlier.

So, the goal of the report is not necessarily to try to have the most accurate prediction of by what exact date are we going to get to a zettahash, but it's more like, what's it going to do in terms of some of the different chapters that I dive into, like how much mining equipment does this take; what's the security budget that is needed to finance all of this, is also not unimportant, you touched on it earlier?  And how much energy is all of this going to take, keeping in mind some of those innovations that you mentioned, like what if we used flared gas mining; what if we don't have any of it either?  I also tried to look at that perspective, because it's important to assume the worst, in a way.  So, those are all things to dive into to figure out, what does the future of mining look like.

Peter McCormack: And, as new miners come online that become more efficient, they're able to deliver more hashes, does that mean the hashrate can go up, but the cost of mining can actually still drop?

Sam Wouters: Yeah, that's possible.  And in some of the projections, I tried to keep this in mind as well.  As mining rigs get more efficient, there are also even scenarios where it would be possible that the total energy usage of the network decreases over time.  But then, we'd need another crazy rate of innovation, a lot of it depends on how much more efficient do mining rigs get.  But it is in theory possible.

Peter McCormack: So, what leads; hash or price?

Sam Wouters: It's definitely price.

Peter McCormack: Yeah.

Sam Wouters: I think ultimately, that's where the revenue needs to come from, that's how people pay for all this stuff.  You'll see periods where, like we've seen over the past year, a lot of mining rigs have gone online, but they were previously invested in, but then there's just a long leading time to get that online.  And people also look at the recent growth that's been there and they're like, "Surely at this current rate, we would get there within a couple of years?"  But there's been a bit of a period where we're just climbing too high and it's just likely that there will be a bunch of corrections in the future. 

There's also part of the report where I try to focus on, what are the reasons why we might not get there, and that's pretty important to consider as well.

Peter McCormack: Okay, well we will get to that.  Probably also, let's explain what the security budget is, because that's an important factor for some people in mining.

Sam Wouters: Yeah, I think, and there's been more discussion around it recently, which I'm happy to see.  So, security budget, it's kind of a way of looking at all of this Bitcoin that's being mined, like how much does all of that add up together over the course of -- the timeframe doesn't really matter, it can be a week, it can be a year, but in the report I used the yearly budget.  And that budget's supposed to be for all of the miners to be involved, to keep running to stay profitable or break even at minimum.  That needs to be there because without it, there's just not much of an incentive to secure the network.

In this graph here we're showing on the screen, it shows in the early years, you just don't really see that on the scale of billions of dollars.  But then starting from 2014, I think it first touched on about $1 billion and it started going up.  This graph, it uses the average Bitcoin price for that year, so if miners decide to sell their Bitcoin at the bottom, which you might sometimes see, then that is not accounted for here, but about $9.5 billion in 2022 was the security budget. 

Then a lot of people have questions around, "Is that enough?  Should it be more?  Is it better if it's more; is it secure enough like this?  What are we protected against?  Does it mean that if someone comes in with $10 billion that they can disrupt the network?"  There's lots of questions that people have around this stuff.  And what I've typically seen in general is that a lot of people say, "You don't have to worry about this, it's a lot of FUD".

But I think it's very important to acknowledge that if you're into Bitcoin, you might have a good understanding of how this stuff works, and you might feel at ease, like it's going to work itself out, or actually disrupting this network is going to cost way more than you see on the screen, in terms of billions of dollars, because you need to get hold of mining equipment, you need to get it online without anyone noticing; there's just lots of these factors. 

But if you're not so much into Bitcoin and you just read this headline somewhere in the news, or you hear it on Twitter from someone who is trying to bump their own coin and saying, "Bitcoin is not going to be secure in ten years from now because the security budget is going to plummet", etc.  Once you start talking about that, people get worried, because they don't have that deeper understanding of what can people even do if they have a significant portion of the hashrate; does it just shut Bitcoin down or does it make it insecure, etc.

So, I think it's an important topic to talk about a bit more and to not handwave away like, "This is going to be okay, guys, don't worry about it", because a lot of people don't actually take that for an answer, especially investors who come in from an outside perspective, they're not really into Bitcoin, they just see this part of their portfolio.  All it takes for someone like that to sell off their investment is to just hear a couple of these headlines and say, "It's not going to be secure in the future".  Then, if they try to do a bit of research and everyone's just saying, "It's going to be fine".

Peter McCormack: It's also interesting, looking at this chart, just to see the kind of percent of the security budget which is coming from fee rewards.  So, it looks like in 2021, it looks like we probably -- well actually, as a percentage, it's probably not as high as --

Sam Wouters: Yeah, 2017 was about the peak, so it was about 13% or so of all of the total rewards.  So, to reiterate there, the miner who adds a block to the blockchain, they get the block reward, which is fixed in the protocol how much that's going to be.  Then they also get the fees for the transaction in that block.  In 2017, there was a huge bull run, so people were just sending money like crazy, exchanges were very inefficient with the block space, so in generally the price --

Peter McCormack: $50 fees.

Sam Wouters: Yeah, was quite high.  So, that added up a good amount.  But now, we've been seeing it much lower than that, so people start to worry because if you actually dive into these different scenarios, which I've also included some images of, what is actually going to happen to that security budget?  Then you can totally imagine why someone who is not so familiar with Bitcoin starts worrying, and I don't raise these numbers and items to try to create FUD and to try to make people worry; I just think it's good to look into, to do more research about, to talk more about, because if we don't do it, people will take this as a talking point to attack Bitcoin and to talk about how it's not going to be secure.

Peter McCormack: But it does look like the security budget of 2021, the amount that came from fee rewards is about the same as 2015's total security budget.

Sam Wouters: No, you're correct.

Peter McCormack: I mean, maybe it's a little bit less, but about that.  So, if there's a lag from the fee rewards of about, I don't know, five or six years from the network, but we continue to see that growth in fees, then we know the trajectory is towards a place where the security budget from fees can be high enough.

Sam Wouters: Theoretically, yeah.  So, I dive into a couple of scenarios, because I was also like, "Why do I do this research?" because we're curious about what is the future of the network going to look like, it's important to just have a bit of an understanding of that.  I don't know, Danny, I included a couple of slides as well with a few scenarios to dive into.

Oh, yeah, I also make the comparison to gold, because I think Lyn Alden brought this up.  She also did a fee security modelling post, which was really in-depth, and she mentioned that if you look at gold, gold has its own security budget as well because people need to store it in vaults, etc.  But I figured gold is a little bit different, because gold is not on a globally shared ledger that you can just attack from anywhere in the world if you have hash power, and also lacks a lot of the properties that Bitcoin has, which could make, for example, nation states want to attack Bitcoin. 

It's a very different type of thing, so I don't know if it's as easy to say, if we just look at a couple of other assets, how much are people spending there on security, and just say for Bitcoin, it's going to be pretty similar.  I don't feel confident enough to say that is a good, healthy approach to look at it.  But if you do take that approach of the 0.7% which is, from what I could tell, what people are spending to secure their gold every year, if you take that for Bitcoin, then you get to a security budget currently of about $2.2 billion.

Peter McCormack: Yeah, I'm just not sure that analogy works.

Sam Wouters: Yeah, but looking at the number earlier, if it's the $9.5 billion or so, then we're significantly overshooting this mark.  But the question is, yeah, it's just a totally different asset, totally different model, so it's kind of tricky to make that comparison, I think.  And I don't think for a lot of people who dive into it a bit, they would feel enough at ease to say, "Okay, this is a good way to measure it", because it's just an arbitrary number at the end of the day.  It's essentially a number that is being set by people who have vaults and it's a market for where you can store your gold or not.

But yeah, I dive into a couple of scenarios here and I try to look at some different ones, like the first scenario, "What if there's no additional Bitcoin adoption?" and I know that's really depressing for people to hear, because everyone wants to see Bitcoin succeed.  But assuming a really bad scenario, if we keep the median transaction fee of 2022, which was about $1.50, and I know some maximalists will be screaming, "You can't measure the fees in dollar terms, it has to be in satoshis per v-byte or something like that", but --

Peter McCormack: You can.

Sam Wouters: -- just to make it approachable for people.  So, there were about 100 million dollar transactions on the Bitcoin blockchain in 2022.  Let's say we have about the same number, because that's just where we're hovering.  The median Bitcoin price if that remains the same as it was for 2022, then the security budget would reduce to $446 million in 20 years from now.  So, there's a reduction of 95% compared to 2022.

Peter McCormack: Why is that?

Sam Wouters: Because the block reward is going to be decreasing, so the number of Bitcoins you earn if you add a block to the blockchain; and then more of the budget needs to come from transaction fees.

Peter McCormack: Okay, I understand what you're saying.

Sam Wouters: So, when you look at this number, and when people are using this number to create FUD to make people worry, if you talk about a 95% reduction in security budget in 20 years if there's no adoption, it's a pretty steep decline.  But no adoption, I think a lot of people are into Bitcoin, they're not expecting that in 20 years from now, Bitcoin will be more or less the same size as it is now.

Peter McCormack: And this is because what you're saying is that if everything stays equal but the block reward's falling, and if Bitcoin stays the same, worth about high $16,000, $17,000, the miners are going to be rewarded with a lot less, and therefore the security budget reduces quite significantly.

Sam Wouters: Yeah, exactly.

Peter McCormack: I mean, what is that, a 95% reduction?  And so, that would mean that the network is a little bit more fragile, considerably more fragile.

Sam Wouters: Yeah, exactly.

Peter McCormack: So, we need the price to go up.

Sam Wouters: That would be handy, but I tried to look at this as well, like what if -- earlier you asked, "How much do we need to grow to get to a zettahash?"  That's a 4X.  So, what if we take the same approach with the median price from 2022, that was my second scenario I took, then you get to a median Bitcoin price of $114,000, and the median transaction fee, let's say that stays the same, which is mostly you have people holding Bitcoin and as a result, not much more on-chain activity.  So, in that scenario, even though the price goes 4X, we still end up with a reduction of 87% of security budget in 20 years from now.

Peter McCormack: Wow!

Sam Wouters: So, for a lot of people, that's a bit of a wake-up call, "Hold on, we can't just buy and hold Bitcoin and only do that, and that's going to help --", again adding a caveat there, this does not necessarily mean that Bitcoin won't work, that it won't be secure, but it will be looked at in a different way if the security budget decreases, because we honestly just don't know how much we actually need to fend off all these potential attacks.

Peter McCormack: There's no "enough" security budget.

Sam Wouters: Yeah, it's like with physical security.  You could spend $100,000 every month on physical security and someone might still figure out a way to kill you.  Yeah, it's just a tricky thing with security in general, this is absolutely not unique to Bitcoin; it's just insanely difficult to model for.

Peter McCormack: So, do you have a number for the price that it needs to be at for it to be able to maintain the security budget we have now?

Sam Wouters: Indeed, that's the next scenario, where I was wondering if there's no more -- if the fees don't really go up, people are just buying Bitcoin and holding it over time, but on-chain just doesn't get used a ton more, then in this case Bitcoin would need to reach somewhere above $900,000 --

Peter McCormack: Okay, we like that.

Sam Wouters: -- yeah, in 20 years from now, to match the 2022 $9.5 billion security budget.

Peter McCormack: Well, I hope it happens, I hope I'm still alive!

Sam Wouters: I hope so too for you!

Peter McCormack: So, this is to me the most important thing we should be doing, is driving adoption?

Sam Wouters: Yes, 100%.

Peter McCormack: And the second most important thing is driving usage?

Sam Wouters: Yes, 100%.  This is really the thing I'm trying to make clear with this is, a lot of people in Bitcoin have this perspective, like there's just been a meme for a long time which is, buy and hold and then the price will go way up and we're all going to get rich, etc.  I think it's really important to think about the security budget as sort of an incentive for people in the space to think about how can we actually get adoption.  It puts a bit of a timeframe on it, not so urgent that you think, if the security budget decreases too much, it can't be used any more, time's up; but a lot of people look at the halving of this way, "It will make the supply scarcer, etc, that's great for price, etc". 

But I look at it more like another four years have passed, what have we done to make Bitcoin more accessible, more usable for people to get it in the hands of those who need it the most?  And I try to look at it a bit more like that, like how can we see this as an incentive for ourselves to not fall into this slumber where we're just buying and holding and thinking of new narratives to be philosophical about Bitcoin; but really, how can we stay sharp and see how can we get this to the people who need it.

Peter McCormack: What is the block reward in that, I mean what's that, 18 years?

Danny Knowles: I'm just having a look.

Peter McCormack: Where are we right now?

Danny Knowles: 6.25.

Sam Wouters: Yeah, we have these smartphone devices, we can just look it up.  I've looked at so many of these numbers so many times.

Peter McCormack: Yeah, 0.39, so that's going to be about $351,000, which that must be -- but that should be what it is right now, right?

Sam Wouters: Yeah.

Peter McCormack: Yeah, because that's maintenance.

Sam Wouters: Yeah, but then also, if the price rises so much, the market cap also increases significantly, so you're actually paying a smaller portion in security budget relative to the total market cap of Bitcoin.

Peter McCormack: It's fascinating to see what will actually happen, because if the security budget continues to grow like it has, I mean some people are going to get fabulously wealthy; but if it doesn't, there are going to be scenarios that people will have to plan for.  I think there's a scenario where some people will maybe start to doubt the future of Bitcoin.  I'm not FUDing it, but they will doubt it.

Sam Wouters: Yeah, and this is why it's so important for there to be more research in this, and as difficult as that research is, I try to give it my best effort in the report, but I'm not someone who can do extensive regression analysis and all of these things; I'm also just a guy who tries to be smart with a spreadsheet.

Peter McCormack: But this is why I think some people have been, "Well, maybe just a little bit of inflation's okay".

Sam Wouters: Yes, there are discussions that will be had, I think many in general, like how do we look at this in the future.  There are lots of different options --

Peter McCormack: Donations.

Sam Wouters: Yeah, but I think it's just good to be open about the discussion and to not cut it off and, "Let's ignore it and let's just leave it be", because then it's going to live a life of its own, and people will use it as a way to talk down on Bitcoin.

Peter McCormack: Yeah.  I mean, we're okay for the moment, because with every halving cycle, we have seen the growth in price which has seen the growth in the security budget, so we're okay with that.  I think we're okay with a slowdown, it's probably okay with a levelling out, it's if it starts to drop.  So, we have to maintain that adoption rate at a higher rate than the drop in the security budget.  I don't know if I've explained that correctly.  But anyway, the point being that we have to drive adoption and equally, we have to drive usage.  Somebody else recently said about, "The hodl meme needs to die".

Sam Wouters: Yeah, I think I've been listening to the last few podcasts, so…

Peter McCormack: Okay, that's super-interesting.  So, one real big and interesting test is going to be, when's the halving?  It's a year-and-a-half?

Danny Knowles: Yeah, 2024.

Peter McCormack: Yeah.  I mean, look, one of the thing's that's also happened in the last year is I believe the full potential price Bitcoin should have got to was suppressed by all the fuckery amongst the borrowers and lenders in the market, Genesis, BlockFi, Three Arrows Capital, Celsius.  There's so much fuckery and with the likes of FTX turning out they didn't even have the Bitcoin, we don't even know if they were selling Bitcoin and not actually buying it.  Actually, there's a potential that may have been a price that would have gone over $100,000.  We won't ever know that, we can only speculate.  But it would be nice in the next run, if one happens, which fingers crossed it does, that it's done in a more stable environment without the fuckery going on.

Sam Wouters: Difficult; human beings.

Peter McCormack: Yeah.

Sam Wouters: I almost thought of changing my name actually, after the whole FTX thing, because I just don't want to give people PTSD about this for years to come being called Sam!

Peter McCormack: I think you get away with it.

Sam Wouters: Yeah, there are good Sams.

Peter McCormack: You just need a nickname; just go with Woots, or something.

Sam Wouters: I guess!

Peter McCormack: Did you have a nickname as a kid?

Sam Wouters: Not really, no.

Peter McCormack: The funny thing is, whether it's that game you were playing, or it's shitcoins, or it's the government, you give someone the chance to print money, they will print money.

Sam Wouters: Absolutely.

Peter McCormack: Whereas, if everyone just focused on Bitcoin, well not everyone, not everyone can win, but if a lot of people just focused on Bitcoin and stopped fucking around, we wouldn't go through this.  Okay --

Sam Wouters: There's one more scenario I looked into and there's lots of different variants you can make of this one, but it's essentially looking at, in the previous ones, I was looking at the scenario where the transaction fee, the average transaction fee remains the same, and that's not really necessarily a realistic scenario; why would you make that assumption?  It's just easy to do some of the maths.

But in this case here, what if the transaction fee started going up, what if the Bitcoin blockchain turned into a bit of a settlement layer rather than a transaction layer, so instead of people using it for payments, it's just batching lots of transactions that are, for example, happening on the Lightning Network, and on other kinds of solutions, like people have also talked about Fedimint, etc.  So, what if these things started taking a lot of the transactions, and then Bitcoin itself is a settlement layer?  So then, the transaction fees could actually rise, because if you are bundling your transaction together with thousands of others, then you don't mind paying a small share of a $50 transaction fee to get that settled on a blockchain, because it's spread over so many transactions.

So, if you mixed those two, then you would still get a Bitcoin price in 20 years from now, like if you wanted to match the security budget of 2022, you would get a Bitcoin price of over $400,000; and the average transaction fee then would be like $50 or so, that's a pretty big bump, which is in 20 years from now, to match that security budget of today.  So, it kind of gives an idea of how much would transaction fees need to rise if you want to match what is there currently.  And again, there's nothing that says or proves that we must match what is there now, that that is the necessary number. 

But it's just good to be somewhat aware of what order of magnitude are these numbers and what order of magnitude might they need to be.  I think a lot of people will be curious about that.  And just even knowing that, like how big does it need to be, is this enough or even 10% of this, is that already definitely secure enough, because there's no way there's going to be a government or just any kind of rogue actor that manages to get that many mining rigs together without people noticing, and then starts censoring the blockchain and just mining empty blocks all over, just not letting anyone compete, and just making everyone struggle that way.  If that's the biggest risk, but if even with billions of dollars you can't pull it off, then we can over-secure the network, but what's that going to do.

Peter McCormack: Yeah, and most likely, the scenario that's going to happen is it will be a combination of these factors.

Sam Wouters: Yeah, definitely.  Just like with so many things, the answers are typically nuanced.  I think it was Mark Moss on an interview you recently had, you were talking like, "There's no nuance left".  I actually tried to operate from the opposite perspective; I assume everything is nuanced, instead of just jumping to a conclusion, "Oh, it's probably that", just putting it in a box.  But I tried to assume it's probably more complicated than I think it is, and then just take it from there and see what exactly are the factors, how much do they weigh, and all this stuff for the probabilities, and then I take it from there.

Peter McCormack: So, when you're looking at this and considering the mining sector itself, what role does mining equipment play in this?

Sam Wouters: Yeah, that's one of the factors, like the second one after the security budget that I looked into, like how many mining rigs are we even going to need to pull this off; is it just 4X, based on the number that's there today; how many are there today?

Peter McCormack: But they will get more efficient though.

Sam Wouters: That is the assumption, and that's betting on human ingenuity, which in general if you look at the history of mining rigs, that's been true, they have been improving a lot.

Peter McCormack: I don't know if it's in your report, but have you tracked the performance of the miners through their innovation cycles?

Sam Wouters: Yeah.

Peter McCormack: Okay, can we see that?

Sam Wouters: Yeah, I think if you go into the slides, Danny, there's the report that's underneath.

Peter McCormack: When I went to the Texas Blockchain Council's event in Austin, I think was it last month, Danny?

Danny Knowles: No, a couple of months ago.

Peter McCormack: There was a guy there who had created like a museum of ASICs and he had them literally from the start through.  It was fascinating to see.

Sam Wouters: So, this one shows the different miner models, the most efficient model every year that was released, like how much power did they need; what was their hashrate per second.  So, this kind of shows the progression.  The equalisation is the watts per terahash thing.  That shows the efficiency, so how many watts do you need to calculate 1 trillion hashes per second.  So, the most recent best-performing models, Antminer S19 XP Hydro at the bottom there, it takes about 21 watts to calculate 1 trillion hashes per second.  Do you see the improvement there in the column next to it?  So, that's how much more efficient they are getting.

Peter McCormack: Oh, okay.

Sam Wouters: So, if you look at this past year, actually that's been the lowest jump.

Peter McCormack: Yeah, 3%.

Sam Wouters: So, only 3%.  So, in the some of the further modelling that I did, I tried to assume the worst-case scenario; what if we only get 3% more efficient every year, because a lot of people have talked about Moore's law and how eventually it becomes really difficult to get these machines more efficient.

Peter McCormack: Yeah, but you know why; they're saving the super-efficient machine for 2024.

Sam Wouters: Yeah.

Peter McCormack: They know what they're going to do.  Did you hear that thesis, I think is was John Carvalho put out, that people are still mining in China.

Sam Wouters: Yeah, I'm sure.

Peter McCormack: China banned mining in a way to radically redistribute all the old inefficient miners around the world, which saw massive mining warehouses created in the US, and come 2024, once the new range of miners and new efficient miners become available, they will be in China and the US will be left with these less efficient machines.  Did you buy anything into that?  It would be fascinating if it's true.

Sam Wouters: Yeah.  I have my doubts that that's the level they're thinking at like, "Let's distribute all this stuff and then screw a lot of people over outside of China", because I think they would also realise, if all the hashrate would then go back to China in a couple of years from now, and that's where the most efficient machines would be, then maybe a lot of people would lose faith in Bitcoin as a result, if they would feel, "China's just taken this thing over", because that's the narrative that would probably --

Peter McCormack: Dude, how many things have we had that should lead to us losing our faith?  With all the shit this year, we should have lost our faith.

Sam Wouters: For sure, but I think more in terms of additional investors, not the people who are in there, because they're going to stick around and they'll keep dollar cost averaging in and buying more, but maybe new investors that just don't really understand much about all of this, they might be a bit frightened.

Peter McCormack: I don't even think they will know it's happening, or read about it.

Sam Wouters: Also true, yeah.

Peter McCormack: I just don't think they'll know.  I think it will be fascinating if it did, I'd kind of laugh at that.  It wouldn't surprise me.

Sam Wouters: Yeah.

Peter McCormack: Interesting, this is fascinating.  Okay, let's talk about the energy side of things.  How does energy impact hashrate?

Sam Wouters: So, energy is just ultimately one of the most important things, because it's responsible for a large amount of the costs that miners have, other than the mining rig part; we're not really diving into that as much, but that's part of the cost.  But ultimately, the energy price defines whether a miner is going to stick around when the margins are really small.  So, what I tried to look into is, what are some of the different scenarios, like how much energy will Bitcoin mining use in general over the next 20 years, in this case, like if we want to reach a zettahash, what is that going to look like; is it going to boil the oceans; is it going to use up a magnitude more energy or not?

So, what I took in this case was the hashrate growth, so the average growth per mining rig that is out there, how much more hashes is it doing per second.  So, on the one hand, you have mining rigs getting more efficient; on the other hand, the newer models that are coming out, they also have higher hashrates than the previous modes that were out there.  And if you do some of the maths on there, then on average, the average mining rig is getting about 3.6% more hashes per second every year.

So, if you take that kind of growth and you map it out, then over the next 20 years you see the hashrate grow to about the zettahash range there, so it's about two-thirds of the graph.  And then, what if mining rigs don't become more efficient than they are today?  That's when you get that first scenario that Danny was just showing, where the power demand would just grow along with the hashrate, it's just going to be the same.  The only thing that happens is people put 3% more miners online every year on average, and the mining rigs just get a little more power in there, but it doesn't really change.

Peter McCormack: By the way, in this, do you account for old rigs going offline?

Sam Wouters: Yeah, exactly.  So, the assumption here is that the average ASIC has about a five-year lifespan, that's what typically gets talked about.  That can be inaccurate, it could be that we find that in ten years, actually this timeframe becomes a bit bigger or it's a bit smaller, but you can model this out the same all over again if you use a three-year timeframe, if you use a ten-year timeframe.  But for now, I've taken five years, and then you assume that 20% of the mining rigs will go offline every year and get replaced by a newer generation.  So, that's a pretty aggressive replacement rate to take, because that just means you have tons of machines all around the world that are being replaced every year. 

But if we take the 3% yearly efficiency improvement that you saw earlier from the 2021 best model to the 2022 one, if we take that kind of improvement every year, then you would see that in terms of power demand, it actually requires significantly less power just purely from this compounding efficiency improvement every year.  So, we're already talking instead of taking 50 GW, you're down to 30 GW or so, which is already quite a big difference.

Then there's another scenario where, if we take the average over the past five years of how much more efficient mining rigs have gotten, because the last year, the 3% was a bit of an anomaly, the previous years there was always a 30% or 40% jump; so, if you would take that kind of number, then you would actually decrease the total power demand compared to where we are today, just because the rate of innovation is so crazy high.  But as mentioned before, it's not necessarily realistic to expect that every year, mining rigs will keep getting 30% or 40% more efficient than the year before, and then about 20% of all the mining rigs get replaced.  But that is what it would look like if that was the case.

Peter McCormack: So, the price of energy is super-important then?

Sam Wouters: Yeah, it's extremely important, because in this case, this talks a bit about the efficiency of mining rigs and that is one part of the equation, but then energy comes in, like you could have the most efficient mining rig but if you don't have access to cheap energy, then you'll still get out-competed by a lot of people very likely.  So, maybe we can skip a bit ahead and some of the energy graphs?

Peter McCormack: Yeah.

Sam Wouters: But essentially, yeah, I think this is still important to point out, I forgot the last part there, even in those worst-case scenarios, the percentage that is actually being used of the total global energy demand, if you go one step further, Danny, you see the percentages on there; so, even in a very aggressive growth scenario, the total power demand from the Bitcoin Network, worst case here would be 0.15% of the global power demand.  That is at a rate where we have 20% growth in hashrate every year for the next 20 years, or in this case this is about 8 years actually to get to a zettahash, that's how long it would take at that rate; but then worst case, we'd end up at 0.15%, and that's assuming that there will be no innovation in mining for the next 8 years, which is just not a realistic assumption, because that's never been the case in the history of Bitcoin.

Peter McCormack: That's a really interesting statistic, and it's great for the FUDsters, who are worried about Bitcoin's energy consumption.  I mean, there was that crazy thing that came out, I'm not sure if it was the Cambridge Group, or somebody that said, "Bitcoin will end up using all the energy on the Planet".

Sam Wouters: No, it was the World Economic Forum.

Peter McCormack: Oh, yeah, fucking idiots, Charles Schwab.

Sam Wouters: It was 2017 and they predicted that by 2020, it would use all the energy in the world.  So, I just tried to figure this out myself, like how much is it actually going to use, and these are the numbers that I arrive at.  But these are just scenarios; it could be that the actual growth rate is significantly higher.

Some people might say, "If you look at the past year, we've gone from 200 exahash to almost 300 exahash in a year; that's a 50% increase in a year".  So, people start taking that number.  But at the same time, it's good for people to realise this has been very much an anomaly.  I think Troy Cross also mentioned this quite a bit when he was saying this was a time period where mining was insanely profitable, so people were buying rigs like crazy and everything came online over a pretty brief period of time.  So, yeah, that's important to look into.

This is also something I try to highlight in the report, that even if the energy increases so much, then the next piece of FUD I guess that a lot of people have is, "But that's all going to be more coal-based energy that is being used for Bitcoin mining, etc, and we have an energy crisis that's starting to blow over a little bit in some parts now.  But what if that energy crisis, how is it going to impact households, etc?"  Actually, if you look at where Bitcoin miners operate, I made this graph here of on the one axis, you have the energy scarcity versus abundance, so how much energy is there around an area; and on the other axis, you have the population, so is it densely populated or sparsely populated?  And if you use these two axes, you get four quadrants.

Typically what you see is that miners do not operate in areas where a lot of people are worried about them operating.  They don't operate in industrial areas where the energy is being used up by consumers anyway; they don't operate as much in cities in general, because typically that's where there is lots of demand, even though in cities they need to over-generate their demand, that's been talked about on a lot of shows, I think.  But they are very much in rural areas where there's a lot of renewable energy that cannot be instantly transported to where the people actually live.  So, that's where miners operate and that's where they get the cheapest possible energy.

This is also where you get into some of the discussion about the vented methane gas, because that is actually, and I would expect in the future, going to be a far more popular source of energy because in essence, you could even envision a future where governments would almost subsidise miners to go and set this stuff up, if they had an adequate understanding of how mining can play a role there.  Then they might say, "Hold on, we need to go all-in on this and actually find entrepreneurs who are willing to put this in as many places as possible to get rid of all that methane gas and to stop warming the planet".

Peter McCormack: Isn't it ironic that this industry, which a number of environmentalists have accused of being damaging for the environment, especially Greenpeace -- is it Greenpeace that changed the code?

Danny Knowles: Yeah, and Ripple.

Peter McCormack: Yeah, those dicks, and Ripple -- is actually something that might contribute to dealing with some of the environmental issues that we have, and we can realistically get to a point where energy usage is actually carbon negative.  I mean, it's ironic that we can get to that point with this technology.

Sam Wouters: Yeah, and it feels like such a tragedy realising this and then thinking, "How can we get these people to understand it?"  One of the goals of the report, I tried to write it in a way where almost everyone can take something away from it, and it becomes a bit of a tool to start conversations.  And I also use it very much to highlight some of the work that, for example, Shaun Connell with Lancium, that they're doing; Adam Wright, who's also been on this show, and Daniel Batten's work is quite prominent in it as well, because he talks a lot about the modelling around it like, "How can we get it carbon negative?"  So, it's just a way to market it, the packages and such, a way to get people interested and see what the future of mining is going to look like and how can these things play a role.

Peter McCormack: But it's insane.  It can become carbon negative while fixing the financial system!  Satoshi, you crazy bastard!

Sam Wouters: Over-achiever.

Peter McCormack: I mean, yeah, none of us know who Satoshi is, but if that person's still alive, I would love to know what they make of this, because I don't think they were, "Yeah, I fucking knew this was going to happen.  That's how badass I was", or they're going to be like, "I had no fucking idea!  I just created this, I just wanted to create a tool for people to sell".

Sam Wouters: That sounds like a story in a pub somewhere, you know!

Peter McCormack: Yeah, "I just created this thing because I wanted to fix money and you guys have taken it to this whole next level".  It will be fascinating, but we'll never find out.  Okay, are there any blind spots in this that you have, and I know if you had blind spots, you wouldn't know them because they're blind spots, but you know what I mean; are there any areas where you've really tested yourself to think, "Where could I be wrong here?

Sam Wouters: Yeah, actually, what I tried to do in the report as well, assume what if none of this methane-based mining, etc, happens; what if we can't get it carbon neutral; what if all of these innovative solutions just don't really get traction, or there's too much FUD, there's not enough support from governments, etc?  So, I tried to assume this scenario as well, and I think there might be the next graph, Danny, that I put in there which focuses a bit on the renewable energy share over time.

So, this looks at how much green energy does mining use in total, or how much of the energy that's being used is renewably sourced, let me put it that way.  So initially, you had that slump there in the beginning, which is when a lot of the mining power went from China to much of the rest of the world, where initially there was still a lot of coal-based mining.  So now, based on the Bitcoin Mining Council data, around 59% to 60% of all the energy that's being used to mine Bitcoin is renewably sourced.

Peter McCormack: Have you compared this to other industries?

Sam Wouters: That is part of their research as well.  They do these quarterly updates and they compare to other industries, and then those are all looking significantly worse, where typically you'll see, in the case of Bitcoin, you're about 60% and in other industries and other countries as well, that's also what it's compared to, they're like 10%, 20%, 30% lower.  So, they use far more fossil fuels for their industry, but somehow Bitcoin is often held to a different standard, because a lot of people don't --

Peter McCormack: Yeah, but you know why.  They don't have an issue with Bitcoin energy usage, you know that.

Sam Wouters: Yeah, for sure.  A lot of people, they just don't really see the point of Bitcoin or they don't feel they need it.

Peter McCormack: Or they don't understand it.

Sam Wouters: They don't understand it or they're envious of people they know that have made money and keep rubbing it in.  So, there's just tons of different reasons why they fundamentally don't want to get it and as a result, it's just --

Peter McCormack: Or they're ignorant, or they've read something wrong online.  But I think if you can sit down with somebody, even the most harshest critic -- and this is why the work that Jason Maier's doing on his book, A Progressive's Case for Bitcoin, is so important, because I think we're pretty secure in our arguments for conservative people why Bitcoin is good.  I don't think we've been so good with progressive arguments or liberals, or whatever you want to call them; the people on YouTube will be complaining about my terms.

But he is talking about the wealth gap, he is talking about these kinds of ideas.  We suddenly have a very strong defence against the majority of the arguments that come at us, getting to the point where you just have to turn round and say, "Look, you don't like Bitcoin.  Just tell us why you don't like Bitcoin stuff, stop with all this bullshit.  What is it you don't like?  You're pissed off you didn't get some?  Well, you're still early, look where we are".

Sam Wouters: Something I try to keep in mind there, and I guess that's a whole other episode worth of content, but I find that a lot of people are not necessarily great at educating others about Bitcoin and they don't understand the level of nuance that is needed, or the way you can actually -- a lot of people think of the perspective, "I need to convince this other person of Bitcoin", and I find that it's the wrong way to jump into it and to try to approach the subject, because you already have an end goal in mind of, "I must convince them".  As a result, a lot of people get a bit pushy, they just start coming up with the arguments that technically convinced them in the past, without really having the empathy or the world view to understand where this other person's coming from and how does this stuff actually come across to them.

I find that when you talk about energy stuff, the best thing you can do, and it's similar to Bitcoin financial talk in general as well, if you find someone very sceptical, don't try to convince them that they are completely wrong and you are completely right; just try to show them that a lot of the arguments that they have are not correct, they're not well-founded.  You don't even need to go the extra mile there and then push Bitcoin onto them and explain everything to them, because it's too much information at once. 

All you need to do is plant that initial seed to show them, "You don't understand necessarily what you're talking about.  If you're interested, I can explain a bit more to you about it, but I don't want to push it on you".  And when you keep it open like that, a lot of people feel like, "Okay, hold on, I've been thinking this stuff for years.  Maybe there is something more to it.  All right, I'll hear you out".  So, you disarm it in a way.

Peter McCormack: You're so right, because whenever you ask somebody for their Bitcoin story, they'll say, "Yeah, I heard about it in 2013, I wasn't sure, but in 2015 I started to get more into it".  Nobody says, "Yeah, I heard about it in 2013 and the next thing, I was really convinced and sold everything and bought all the Bitcoin I could".  Everyone has those first couple of touchpoints to go, "Okay, why didn't you buy a shitload on the first day?"  "Well, I wasn't sure".  "Okay, but everyone you speak to is at that first touchpoint.  Let's be empathetic".

Sam Wouters: And to be honest, not even necessarily, because nowadays almost everyone's heard of Bitcoin --

Peter McCormack: Everyone's heard of Bitcoin.

Sam Wouters: -- and they all have an opinion about it already.  And back when I got into it, there was very little non-technical information and there was very little written about it in general.

Peter McCormack: But you still drew an opinion. 

Sam Wouters: Not as much, I was just curious.  I was like, "It sounds too good to be true, so what is the catch?"  That was my perspective and it took me months to actually understand, because there was almost no non-technical explanation about it.  And I think some of the Andreas videos started going around at that point, and that started helping, because finally someone I can understand who's not talking about the code as much.

But I think nowadays, it's very different, it's more political.  The world is, I guess, a much more complicated and a much more tense place in a way, people are just hyper-focused and distracted and all of these things at the same time.  So, people come into Bitcoin in a bit of a different way, I think, and trying to convince them that's it worth spending time on is tricky when everyone's just very pressed for time and they want the TL;DR, they want the quick explanation.  They like the headlines that just say the quick thing, like you don't have to worry about it; because then they also feel good like, "I don't have to worry about Bitcoin.  It's not going to work out".  They just tell themselves that because they feel like they missed the boat.  So, some of them are just actually hoping that it won't succeed, because then they'll feel extra bad they didn't get in earlier.

Peter McCormack: Yeah.  Okay, so what are the constraints for us getting towards a zettahash?

Sam Wouters: Maybe to round this one up, this energy thing --

Peter McCormack: Okay, have I missed something?

Sam Wouters: -- if you project this growth rate out of the conservative case of about 1.7% more renewable energy every year, then on the next graph, if you plot this out over the next 20 years, then we'd get to 93% renewable energy used for Bitcoin mining.  This is just assuming there won't be any vented methane mining, there won't be any of those use cases where people are trying to use mining to be more efficient in general.

Peter McCormack: That's fascinating.

Sam Wouters: So, it's just going to green itself by the fact that solar and wind have gotten a lot cheaper over the years.

Peter McCormack: Would you consider if they started mining on nuclear, would you consider that green?

Sam Wouters: I suppose so, yeah. 

Peter McCormack: I would.

Sam Wouters: I had a question on the report actually where someone's like, "Where's the nuclear mining section?"  I was like, "It's just not at a scale where I can really plot anything out into the future.  There's not enough mining today done with nuclear to say anything meaningful about that".  It's not that it wasn't in there because I don't believe it's going to happen, or I believe that it should be looked at or not; it's just a matter of the data isn't there and I don't want to make this an opinionated piece, where I start talking about, "I think this is the future of mining".  It's just looking at the data, how does it potentially play out.

Peter McCormack: Okay, so the constraints, let's get into that.

Sam Wouters: Yeah, so constraints, I think your last show, that is live anyway, the Matthew Pines one, I was actually thinking he would talk about one of these in there, because it's about the whole US and China conflict and what we've recently, or a couple of months ago, saw was that the US started giving China some trouble by cutting off essentially employees from working for their chip manufacturers, etc.  So, you start getting into this chip conflict.  And what also has chips?  It's Bitcoin miners, ASICs. 

Now, if we look today, there is a graph in there as well, Danny, with a global map.  I think it's this one, yeah.  So, it shows the active ASIC manufacturers around the world.

Peter McCormack: Is the Intel model out?

Sam Wouters: They have made a model, but it's not being sold yet, as far as I'm aware.  So, they have a model but it's not in the market.  The other three active manufacturers, at large scale anyway, that I could find, MicroBT, Bitmain, Canaan, known for their Antminers, I think Whatsminer and Avalon.  So, they're the biggest out there today, but all of them use Chinese suppliers in some kind of way, or they use chip factories around the area, and you had this kind of movement from the US against China.

Now, what if China would retaliate; what if China would say, "We're also going to ban export of chips to the US".  It's a possible future, no idea how likely that is, but if that were to happen, where is the majority of the mining hashrate today?  It's in the US.  So, if China would say, "We're going to return this action, this policy in kind", they will also ban exports from China to the US, then there could be a scenario where it just becomes a lot more complicated to get miners in the hands of US-based miners.

Peter McCormack: And China could control a lot of hashrate and 51% attack the network?

Sam Wouters: Well, there's some questions there because in essence today, China has banned Bitcoin.  I think one of the next graphs, it shows the share and it also shows how actually mining isn't really banned in China.  So, there was this brief period in 2021 --

Peter McCormack: This is the theory.

Sam Wouters: -- where they tried to ban it, but then a lot of those guys started going off grid, smaller-scale operations started distributing themselves.

Peter McCormack: Come on, you can't hide 21% of the hashrate.

Sam Wouters: Not easily.  But from what I've seen and from the research that's out there, a lot of this is just off grid, which makes it a lot more difficult to find out where exactly it's located, and they obviously don't report as much of their statistics, which is also why the data is a bit older, it's from January 2022.

Peter McCormack: I don't believe it.

Sam Wouters: Okay.

Peter McCormack: I don't believe that they can hide 21%.

Sam Wouters: So, keep in mind this is from about a year ago; it could be that it's significantly lower by now --

Peter McCormack: Or higher.

Sam Wouters: -- because a lot of it has been cracked down on -- or indeed higher, so we don't really know, but it's quite difficult to track.

Peter McCormack: Okay, so those countries -- oh, look, go on, Ireland!  Ireland with 2% of the hashrate.

Sam Wouters: So, important to keep in mind there, there's a little asterisk next to those countries, because that's just where the IP addresses are originating, so they might be using VPNs and they're actually mining in other locations.

Peter McCormack: I was going to say, I would have thought Ireland would be too expensive.  But that said, we've had a couple of miners reach out to us from Ireland, haven't we?

Danny Knowles: There's the Scilling guys, they're farm mining.

Peter McCormack: Yeah, go on, Ireland!

Sam Wouters: So, the US has grown significantly, and if there's tensions there where it becomes more difficult to get miners to the US, that could change things.  At the same time, if mining remains banned in China and the government says to those manufacturers, "You're not allowed to export to the US any more", then in essence, there's no reason for those companies to exist.

Peter McCormack: Well, couldn't they export to other countries?

Sam Wouters: Yeah, sure, that could definitely happen.

Peter McCormack: Yeah, interesting.

Sam Wouters: And you'd likely see black markets emerge where people still get the mining rigs over there, but that could slow down the hashrate growth.  I don't think it would necessarily stop us from getting to a zettahash, because you still get more efficient mining models.  So eventually, decades from now, a single mining rig, for all we know it might be able to do a zettahash; that's eventually going to happen anyway.

But one of the items here as well is if you look at the US that's grown significantly, what if there's a policy change in the US that just makes mining in general far more difficult?  It's unrealistic, I think, given the White House report where they're acknowledging, "Okay, it can be used for good reasons too", and in general the perspective has been, "Let's not use fossil-fuel-based mining.  But if you can do renewable-based-mining, then okay".  So, I think it's unlikely.  If that were to happen however, if the US Government were to be, "All right, we don't want mining around here", that could again force a lot of miners to go look around the world like, "Where can we move to then?" and a lot of other countries might consider adopting US policy too. 

That would just create a period of uncertainty, it would slow down hashrate growth, new investment in the space.  So, that's a potential hurdle to continuing to grow the hashrate as well, along with all the security budget related stuff like, "How are we going to pay for all of these mining rigs?" and potential conflicts and, "How do we get the mining rigs around the world to the people who want to pay for that?"

Peter McCormack: I'm still fascinated by the Ireland statistic.

Sam Wouters: Yeah.  I think a lot of it, this is data based on the Cambridge Centre for Alternative Finance, and they mention, "We can't really determine the actual location of a lot of this mining".  Daniel Batten has also challenged some of their research to figure out how accurate are their numbers, and he's found a lot more off-grid mining, which they're not actually keeping into account in their numbers, it's more difficult, and they're trying to rework their whole model to get it more accurate.  So actually, it's a little bit off from where the reality is, but not by a significant amount based on Daniel's analysis.

Peter McCormack: We should speak to those guys and see how they can afford to do it in Ireland, because it's completely unaffordable in the UK; I'd be interested to find out about that.  Okay, anything else we've not considered with regards to this, like regulations, or…?

Sam Wouters: No, I don't think so.  The US thing there would be the biggest issue, because that's where so much of the market share is.  It could be that China cracks down on it once more, even heavier, and then part of that hashrate will just spread out around the world as well.  Or again, per your theory, just stick around there but become state-owned.

Peter McCormack: Okay, so how do you think this will all play out?

Sam Wouters: It's nuanced, I would say.  So, what I hope to see, maybe that's a good thing to talk about, I think one of the previous slides, Danny, the one you made of the Troy Cross show -- you should give Danny a raise for this one.

Peter McCormack: Give Danny a raise?

Sam Wouters: Yeah.

Peter McCormack: Fuck off, man!

Danny Knowles: It wasn't me that made this!

Sam Wouters: So, on the Troy Cross show you had recently, he talked about this idea of, "What if we start seeing people use miners for all kinds of other business models, like they repurpose the heat, for example, to dry wood to make whiskey, all these examples have been brought up, they start integrating that into their businesses.  He's also talked about the carbon capture methods potentially in the future, miners being used for grid stabilisation.  So, you start to see this shift over time where the security budget today is very largely dependent on what are miners making, just based on the Bitcoin blocks and what's in there in terms of transaction fees and block reward.

But we might see in the future where they make a bunch of their profit from reusing that heat from just helping energy grids, etc.  So, I hope to see a lot of innovation there and just a lot more attempts from entrepreneurs to try to make this stuff work and to -- it's human ingenuity in a way, it's trying to figure out ways like, "How can we get the most out of this?  How can we just make this business sustainable?" 

In a way it's like diversifying the income stream, like we're not just getting it from the Bitcoin Network where sometimes margins might be really small, but we're also just integrating it with businesses.  So, I hope to see a lot of that, but also it's a very hard path, it's difficult to take so many different disciplines to get all this stuff.  And I think I talked to Troy a little bit about the episode, because I feel like one thing we can do to help accelerate this future is to talk a bit more about what is needed, like how do we actually get to that point; what kind of roles are needed to make this stuff if you have an idea of what is needed there.  And I think in general, it's lots of engineers who understand how you repurpose heat in economical ways, and you need business people, more business-minded people, who can run the economics on that, because engineers can also do that but they should be spending their time on these things.

So in general, I think there's lots of people sitting at the sidelines of Bitcoin and looking and thinking, "I would love to get involved in this industry, but I'm not a coder, I'm not a developer so I don't know how to do that and I'm not necessarily a good writer, or I'm not a podcaster, so what could I do?" but there's so many opportunities I think, if people get a bit creative and start looking into, where do we ultimately want to get to.  And this is really, I think, a thing that will grow a lot over the next decades, where people just try to figure out, "All this time, we've been wasting the heat from these miners because it was just easier to set it up this way", but could we diversify some of the risk in our business and just start also helping the narrative around mining, etc, and just showing people, "This is how we can be super-energy-efficient, and this is how to apply it to all kinds of use cases.

Peter McCormack: Fascinating.

Sam Wouters: So, I made this graph of the episode to kind of show that discussion.

Peter McCormack: Okay, so look, if people want to read this, I mean we'll put it in the show notes; if people want to read this and get in touch or speak to you, how do they get in touch?

Sam Wouters: I'm on Twitter @SDWouters.

Peter McCormack: Yeah, I'll put that in the show notes.

Sam Wouters: Or, you can just look up my name.

Peter McCormack: Oh, Wouters?  And I said, "Woots"!

Sam Wouters: No problem, that's fine.  No, I think we've talked about most of the things, like some of the things in there we've touched on, like negative energy pricing, getting to all these climate goals and all these things.  Lots of this stuff I try to touch on in the report, like what kind of role can it play there, just to make people aware what's the size and scale of this thing.

Peter McCormack: Dude, I'm massively out of my depth with a lot of this, but it is fascinating. 

Sam Wouters: Yeah, I'm by no means an expert on it either, but just purely driven by curiosity of what is the future of the network going to look like, and this has also inspired me for the next thing to start working on.

Peter McCormack: Well, it gives us a few things to keep an eye on, right.

Sam Wouters: Yeah.

Peter McCormack: Fascinating.  So, my conclusion is that we need to drive adoption, drive usage, ensure that we don't have any stupid regulation and hope China and America don't go to full economic war!

Sam Wouters: Yeah, and even worst-case scenario, we focus very much on driving adoption and it turned out, "Oh, we didn't need that much security budget", well we still got more adoption, so it's a win/win situation ultimately.

Peter McCormack: Win/win, yeah.

Sam Wouters: But we should keep focusing on it, like how can we all use our talents to help Bitcoin grow and not just sit at the sidelines and hope it will do it by itself, or other people will do it for us, they'll put in a lot of hard work.

Peter McCormack: Exactly.

Sam Wouters: We've got to make it happen.

Peter McCormack: Fascinating, man.  Well, listen, appreciate you coming in to do this.  I know you've got the conference next week, so I hope you have fun at that.

Sam Wouters: Thank you.

Peter McCormack: And, yeah, we should catch on this in the future, maybe come back in a year and figure out where we're at.  It would be really interesting to benchmark all of this.

Sam Wouters: Yeah, I'm planning to, and also I previously wrote a report on the Lightning Network.  So, the company I work at, River, we also offer -- we have some of the biggest nodes in the Lightning Network, so I made a report about that as well; I'm also planning to repeat that every year with all of our insights there.

Peter McCormack: Well, send that to us when you've done it.

Sam Wouters: No, it's already made.

Peter McCormack: Oh, okay.

Sam Wouters: I presented about it at Bitcoin Amsterdam, but when I do the new one, sure, I'd be happy to share it.  There's just lots of these topics I think you can revisit over time to sort of see what kind of track are we; is it somewhat accurate.

Peter McCormack: I'll be so interested to revisit this in a year and 18 months, I think, like pre-halving, post-halving to see where we're at, because it might just be, "Yeah, Bitcoin's done its thing, on we go.  Let's not worry for another four years", and then we can all get super-excited and then all get depressed when the price comes down again, and repeat the same shit we do every four years.

Sam, thank you so much, man.  Stay in touch.  Anything you need, just reach out to me and Danny.

Sam Wouters: Yeah, will do.  Thank you for having me.