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The "What is Money?" Show
WiM056 - The Saylor Series | Episode 14 | Bitcoin’s Seven Layers of Security #1
01:18:40
Michael Saylor joins me to discuss anthropology, energy, and technology from first principles as we build the intellectual foundation necessary to truly grasp the historic significance of Bitcoin.
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- [00:00]
Michael Saylor
Foreign.
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Robert Reedlove
Hey guys, this is Robert Reedlove from the what is Money? Show. And as you've learned by watching this show, Bitcoin is the single most important asset you can own in the 21st century. And one of the most important companies in Bitcoin today is NYDIG. NYDIG's mission is to facilitate financial security for all. They accomplish this by bringing a high level of professionalization and sophistication to the bitcoin marketplace. As a true game changer in the industry, NYDIG is safely unlocking the power of Bitcoin for forward thinking individuals and institutions alike. By using nydig, you will gain access to an end to end institutional grade platform providing, providing Bitcoin OTC transactions, Bitcoin collateralized borrowing, secure custody, asset management, derivatives financing, market research and more. And all of these services meet the highest regulatory, governance and audit standards. Led by Robbie Guttman, Yin Zhao and Ross Stevens, NYDIG has absolutely exploded onto the bitcoin scene recently and is leading the way for ongoing institutional adoption in this nascent asset class. So please be sure to check out NYDIG as a single source for all your Bitcoin needs. So we've talked about Bitcoin and how it's dematerializing these critical security functions traditionally provided by banks and or governments. And it's doing this through this proof of work security model. But you've laid out this framework that I think is very brilliant. And it's, you know, proof of work has many layers to it that I guess you would say these are protecting it from disruption. So maybe you could just introduce that model and we could walk through it.
- [02:02]
Michael Saylor
Sure. You know, I've called it the seven layers of security. But I think we should start. Excuse me, start with a fundamental observation. What we're trying to create with Bitcoin is a digital property network, something that will last for 1,000 years or 10,000 years. How do I create digital property in cyberspace? And we can call it money if we like, digital monetary network or digital property network. But what I want is I want a decentralized network that will last past the average life expectancy of a human being or an institution or a nation state. So how do I do that? Well, with the beauty of proof of work is that the network derives its integrity from the interplay of the miners and the nodes and the holders or the wallets if you will, but with a special emphasis on the miners. What do I define as security? Well, property needs to be optimized for integrity and durability over time, integrity, meaning the protocol can't be corrupted, can't mutate. If the protocol mutates, we go from 21 million to 48 million. You get a monstrosity, you don't want a mutation. And then I don't want it to die. If I said I want to design an immortal creature, something that'll live for a million years, and I want it to maintain its integrity, then I've got to protect the protocol. And then I've also got to feed it energy and resources continually and I'm just going to call that. And I have to protect it from a hostile attack in the near term. So a lot of times when we think about security, we think about just avoiding an attack, but really security is you can't attack in the near term. We don't want it to die. And most importantly, if you live, but you go insane or you get a grotesque mutation, then did you really live? So how am I going to achieve my quest for immortality in a network? The beauty of proof of work is it is an open protocol that is Darwinian and competitive in a way such that it is not just self correcting on the protocol level to ensure correct money, but it's also self healing and it's adaptive to the environment around it. So I like to call these the seven layers of security. So what do you have? You have an energy layer, a technology layer, a political layer, a financial layer, a network layer, a spatial layer and a temporal layer of energy. Those seven, seven various dimensions. So let's start with the first dimension of security. Energy. I have a hash rate. Say we've got about 100 exahash right now. Well, I have to feed it energy in order to create the 100 exahash. Bitcoin is a big customer of energy. So in fact it turns out that bitcoin is the most valuable use of energy, or maybe the most valuable, most compelling industrial customer of energy in the world. Right now you can generate about 40 cents a kilowatt hour in revenue mining bitcoin. So that makes it interesting because that co ops all the energy industry. One way that bitcoin spreads and stays organically vital is it forms partnerships with the energy industry. If you have a volcano in the middle of Central America, the value of that energy sold within 500 miles of you is like one penny a kilowatt hour, unless you sell it to Bitcoin and it's 40 cents kilowatt hour. So Bitcoin is the best customer for your volcano. Bitcoin is a customer of stranded energy, intermittent energy, energy on any frequency, and energy at any scale. And you don't need to be co located with an industrial customer or a consumer and you don't need bandwidth. So for example, what's the second best use of energy? Maybe like running Netflix or Google data center. But if you want to run a Google data center, you need to be within, you need to be within fiber optic distance of the major switching networks because you're streaming video and streaming a lot of high bandwidth queries. So they're bandwidth intensive and they need to be triple redundant because they need to be, they can't fail. If you're, if you're trying to operate a car with Google Maps, you can't afford to have an outage in the network. So bitcoin miners are, are so much better than a typical data center because you could monetize the entire volcano, or you could monetize the entire waterfall or the entire nuclear reactor, the full bandwidth of it. You could do it at the North Pole, you can do it with a satellite uplink, and you can monetize intermittent energy coming off of wind or wave or solar, and you can also shut it down in a heartbeat with fairly low economic cost. That makes bitcoin the most compelling technology for the energy industry that's come along this decade, maybe in a long time. The last big energy technology was aluminum, when people would use their excess aluminum, sorry, their excess energy to smelt aluminum. Well, bitcoin rebuilt up and in spades to do bitcoin mining. You don't need a port to ship aluminum out of. You don't need an aluminum factory, which is difficult, and you don't need aluminum ore. And you also don't need the industrial demand for aluminum, which eventually saturates. Aluminum is a specialty metal, right? So what is bitcoin? Bitcoin is money. Okay, so half of everything that the human race has is bitcoin or will be bitcoin in time. So bitcoin mining is securing and producing something which is of enormous value on a very thin line based upon any flavor and frequency of energy. And there's really nothing like that. Why does that make the network secure? Well, bitcoin miners are continually looking for new energy sources, and they're negotiating for cheap energy. And when they buy it, they become a big customer. As they become customers of energy producers everywhere in the world. The energy producers become political allies of bitcoin. So the energy producers are all regulated entities, but they're all very credible and they all are wired in the Political fabric of every society. If you are the best customer of the utility in the city or the state or the country, then that utility has a vested interest in protecting your interest. So bitcoin co ops, energy companies, and also bitcoin is hope for a utility. If you're a value stock 100-year-old utility company, you're not getting a high multiple in the stock market. There's not a lot of excitement. In fact, you're regulated. And there are limits on how much money you can make by selling your energy to consumers or to businesses. If the power company in New York City just jacks the price of energy by a factor of three, they get shut down by their regulators. On the other hand, if you get in the bitcoin mining business, you don't have those kind of regulations on you. Bitcoin is a chance for energy companies to become technology companies and it solves so many of their problems. I can generate more revenue. Check. I can generate revenue at much higher price per kilowatt hour. It's a very high price customer. The value and use of electricity for bitcoin miner is higher than any other customer they have. So that's good. Check. It's portable. That means every place I've got stranded energy production facilities, I can move the bitcoin mine to the energy. Check. That's interesting. It's an energy shock absorber. If I have a renewable energy network, say with wind and solar, what I want to do is I want to build it to the level of peak demand. But if I build at the level of peak demand, I will overbuild it by a factor of two or more. And that means I'll be running at 50% utilization for my consumer and other industrial customers. So how am I going to find a customer that's willing to actually take up half of my energy production and then turn off for 10 hours a year or 20 hours a year when there's a brownout without complaining. The hospital is not going to do that.
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Robert Reedlove
Yeah, yeah, yeah.
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Michael Saylor
Homes aren't going to do that. So I need some kind of industrial producer that becomes a shock absorber. They're going to drive up my utilization to 98% and then when I brown out, they're going to turn off and give back energy to the network. So bitcoin represents a driver for the development of sustainable and renewable energy. It also represents a technology to provide more reliability and fault tolerance to a power grid.
- [14:05]
Robert Reedlove
Right.
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Michael Saylor
If you think about the role of capacitors or batteries or shock absorbers in Electrical machines or in mechanical machines. That's what Bitcoin is for, a power network.
- [14:21]
Robert Reedlove
Right. Let me ask you this. So you described money as energy, sociopolitical energy. And so in that framework, I guess we could consider banks, historically, where they were actually providing custody of gold. They were like energy stores in a way. We're storing this excess productive economic energy and gold that banks were custodying for us. And now with Bitcoin, we have this more direct path to monetizing energy. What I think about here is there's this interesting thing where you've heard of a power bank. These little devices that will charge your phone or whatever, it stores energy. So it's like banks and power banks. Do you see the energy producers and banks somehow converging? Because it seems like on a bitcoin standard you eliminate the need for a custodial bank. They become synonymous with energy producers. Do you see those industries coming together in the future?
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Michael Saylor
Well, I think once you understand that a bank is storing monetary energy, then you've got a bank of batteries that's storing electrical energy. And then Bitcoin is sitting in the middle. It's encrypting the energy from electrical energy into monetary energy. And so on one hand, it's upgrading the raw physical energy through the encryption process. And then on the other hand, it's digitally transforming analog fiat energy into encrypted money, digital money. That makes Bitcoin a bank, an energy bank, a monetary bank. It makes it the world's greatest battery. You could look at it from two angles, right? Banks are bleeding off 1% of your energy a month due to inflation. Batteries are bleeding off 1% of your electrical energy a month just due to battery engineering. You've got two inefficient energy systems. Batteries and power grids don't work that well. And fiat banks and monetary grids don't work that well. And bitcoin plus lightning gives you a battery to store all the world's energy forever without power loss. And the other day I sent 1000 sats on the lightning network and in one second for one sat. So literally you've got speed of light nearly. What is the cost of one sat? It's such an infinitesimally small number of a fraction of a penny. So Bitcoin's a very efficient energy system. I think that the significance here is that bitcoin is disruptive technology for the entire energy market and it's co opting the energy producers and energy investors into Bitcoin. What you see right now is you See a lot of traditional power companies that used to be in the energy business, they're getting into bitcoin mining, people with natural gas, people in the nuclear industry, people in the wind and solar industry, they're getting into bitcoin mining or they're partnering with bitcoin mines. So bitcoin recruited energy capital and bitcoin secures the network with energy capital. Hundreds and hundreds of producers of energy are plugged in the bitcoin network creating that hash wall. So that's the first layer of security for bitcoin. And if you're going to attack it, it's no small feat to go and collect that much energy. You almost can't. You're not going to collect twice as much energy or as much energy as is currently in the bitcoin mining network. Politically, economically, practically. I just don't know how you would do it.
- [19:02]
Robert Reedlove
Right.
- [19:04]
Michael Saylor
Very, very problematic. And there's no shortcut in that regard. There's an energy wall and you have to jump over it. And it's a lot. At the point where you're talking about 100 terawatt hours of energy or something, it's a lot of energy. So the second layer though is technology. And this, I don't think people really understand that. Well, and when I talk about technology, I'm referring to bitcoin ASIC miners. You know, bitcoin is a wall of encrypted energy. So the energy is the first part. But the encrypting the encryption, the crypto is the second part. The crypto wall of energy. It's not raw energy. If it was raw energy, you just need 100 terawatt hours to start to get parity. But when it's encrypted energy, I need 100 exahash of SHA256 mining equipment. And since it's like 10,000 miners to get to an exahash right now. Okay, then that's a million mining rigs of the latest build. How do you come up with a million mining rigs? It's like no one's got a million mining rigs sitting around. I mean it's, it's not clear how long it would take to manufacture a million mining rigs. Bitcoin's co opting technology companies. So Bitmain is a big player. But there are other big players too. And as bitcoin gets larger, I think you'll see the intels of the world and you'll see other semiconductor companies designing bitcoin mining rigs and getting into space. This is another Example where this is open and competitive, who wants it the most? Whoever wants it. And what capital you need. This is semiconductor fabrication capital. You have to fabricate these ASICs. The S19 family is five times more efficient than the S9s. If you wanted to generate an exahash on the S9 family, it took 150 megawatts of power. That's a lot of power. If you wanted to do it with S19s, it's 30 megawatts of power. A 5x difference in a generation. If you get through two generations every 10 years or three, right, you're talking about 20x improvement. I mean, we're 100x more technically efficient today than we were eight years ago. Where will we be in 10 more years? We go back and forth, right? There's all sorts of people with opinions. There's Moore's Law. Some people think that ASIC technology efficiency will slow down. But then again, people have been predicting that we would hit a wall in Moore's Law for a while, and they're still not quite right. So when you understand the Bitcoin network, what you can think is that the bitcoin mining network 10 years ago was very energy intensive and technology poor. There's a time when you were just using off the shelf chips and then you were using GPUs and then you were using ASIC first generation and then ASIC next generation. So we're like five generations into this now. In the early timeframe, you threw, think about it. You throw probably 1,000 times, if not a million times as much energy to generate a hash, right? And now you're throwing 30 megawatts to generate an exahash. But we'll get to the next generation where it'll be 5 megawatts. And then what happens when you get to 1 megawatt? Well, so as you go out, energy is still important, but it turns out that the network is rotating from energy intensive security to technology intensive security. What if you imagined one day there'll be 10 million mining rigs, but there'll be seventh generation ASICs and they will be 100 times more efficient than anything we have today. What that means is that 99% of the hash power will come from that generation of mining rigs, which means that all this stuff that we have today becomes 1% of the network, which means it gets squeezed out of the ecosystem. All those miners that are obsolete go out of business. That technology intensity has a couple of dynamics. One one is that's what keeps the network from consuming all the Energy in the world. People say silly things like, oh well, the energy usage is going to increase with the price. Well, no it's not. The energy usage maybe will increase with the log of the price. That is, if the price goes up by a factor of 10, energy usage might go up by a factor of 2. And if the price goes up by a factor of 100, energy uses might go up by a factor of three, three or four. But what you've got is a situation where the halvings are cutting the block reward in half every four years. So that's a built in 5x improvement in efficiency every decade. And then if you crank over that another 10x improvement in hardware, you're talking about a 50 times improvement in tech efficiency in a decade or 50 times 50 in 20 years. So the price has got to go way up and even. So what you've got is a rotation. The network is rotating from I burn a lot of energy to generate my hashes. Do I burn less energy to I burn less energy to generate more hashes. It's not hard to see this. It's in your iPhone. Your iPhone has more processing power than the space shuttle had 40 years ago. You've got a supercomputer in your pocket. You got to assume that the security chips that generate the hashes just keep getting better. And because bitcoin is unique in the protocol, all of the other processing power is irrelevant. Right. Bitcoin is a Darwinian competition to generate the Shaw 256 hashes and it's 95% dominant in that game right now. Right. I mean there's a few other crypto networks that use that, but they're like 1 or 2%. So that uniqueness with regard to the proof of work protocol protects it from an attack from all of the AWS network or all the Google network. Or if everybody turned their iPhones at bitcoin mining, it wouldn't help them that much. Right?
- [26:39]
Robert Reedlove
Yeah. The theme here between the energy layer of security and the technology layer of security is that bitcoin, you said bitcoin is essentially co opting these industries. So it's incentivizing. It's a source of demand for energy that's basically unquenchable. And it's a source of demand for.
- [27:03]
Michael Saylor
Semiconductors, for specialized mining semiconductors.
- [27:08]
Robert Reedlove
Specialized mining semiconductors, yeah.
- [27:11]
Michael Saylor
People think, well 60% of the miners cost is going to energy. Well, actually the miners are spending money on energy and they're spending money on semiconductor mining rigs and then they're spending Money on the mining centers themselves, the heat sink, the heat engineer and the generators and like. So there's a competition. And the question is, are you better off having inefficient miners and more and cheap power? Are you better off having efficient miners and expensive power?
- [27:44]
Robert Reedlove
Right. And do they coexist? That was my next question is, do they? So the, the new generation miners go to the more expensive energy sources and then the older generations roll off to cheaper energy sources and they both operate.
- [27:57]
Michael Saylor
Yeah, well you've got three generations of miners. People are running old inefficient miners in China on free power. And then in the US and North America, publicly traded miners are buying the latest generation expensive miners because their power is more expensive, but they have more capital. If I have 500 million in capital, spend $60 million, buy 10,000s 19s, mine 1 exahash on 30 megawatts and make $120 million a year. Good deal.
- [28:35]
Robert Reedlove
Probably.
- [28:35]
Michael Saylor
Good deal. Right. So in that case you would rather buy the better equipment. And I think you find any given time there's like two to, there's three generations of mining equipment when the price goes high. If you look at the hash rate of the network back in the first quarter there was a point when the hash rate got to like 190 or something and I thought the peak was 170, but there was a surge up by about 10 or 15 exahash. I posit that that surge was because people turned on third generation mining equipment like the oldest, least efficient stuff. And there's a relationship. An S19 is generating 40 cents a kilowatt hour right now. Ergo it is profitable to buy electricity up to 39 cents kilowatt hour. An S9 was five times more inefficient. So S9s were profitable at 8 cents a kilowatt hour. But if you go back one generation before that, if you're five times less efficient than that, you're profitable at one and a half cents a kilowatt hour. So the break even point is a function of the semiconductor or the joules per terahash. Right. And that's a technology driver, it's not an energy driver. And most of the people that model bitcoin mining, they don't really focus upon the technical efficiency of the miners. And by miner I don't just mean the one mining rig, I just mean the mining operator that has a mixture of first generation, second generation, third generation equipment.
- [30:25]
Robert Reedlove
Yeah.
- [30:27]
Michael Saylor
The price and you may turn off like if the price of bitcoin went to $5,000 a coin. Right now people would probably turn off the old mining equipment if they had to, unless the energy was free. Right. You can bootleg bitcoin on free energy if you're stealing the energy. But if the energy costs 3 cents a kilowatt hour, you're going to turn off your old equipment, you're going to keep the new equipment running and that's an adaptive correcting system itself. When the price goes up, you're going to turn on the old equipment. Over time though, these are transient phenomenon because the more important phenomena to focus on is that over a decade the technical efficiency of the mining network is going to increase by a factor of 20 to 100 depending upon the rate at which people upgrade the semiconductors. And you know, there are a lot of ways you can enter into the network and you can disrupt equilibrium. One way is as a nation state you can start mining off of a volcano. The other way is you can design a totally new family of asics. So you know, maybe intel or Apple wants to get into space, they could disrupt it. A big energy producer could disrupt it. Right now the limiting factor is the number of mining rigs you can get your hands on. That's good, right? That creates, that creates some predictability to it and that keeps, that keeps us from going chaotic. If you look at these two layers of security, the energy layer is co opting energy providers all around the world and the technology dimension is co opting semiconductor manufacturers. And if one of them like Bitmain gets too much power, Jeff Bezos famous line. Your margin is my opportunity.
- [32:41]
Robert Reedlove
Right? Yeah.
- [32:42]
Michael Saylor
Right. So if, if one company gets too much power then well this is not terribly complicated engineering. I mean, you know, it's well understood how to design SHA256 ASICs.
- [32:56]
Robert Reedlove
There's a capitalism difficulty adjustment.
- [33:00]
Michael Saylor
Yeah, yeah. And there are a lot of companies like Qualcomm, intel, when they get squeezed, they need a new market. This is a new market for them. At the price, as the price goes up. The interesting thing of course is if there's only one provider of SHA256 miners, Bitmain, doesn't that create an artificial scarcity to hash rate? If there is a scarcity to hash rate, doesn't the price go? The profitability of bitcoin miners goes up.
- [33:36]
Robert Reedlove
Right, right.
- [33:39]
Michael Saylor
And so if the profitability of bitcoin miners goes up, then don't more people want to get in the business? And if more people want to get in the business, don't they need to buy bitcoin mining rigs and if they need to buy it and there's infinite money, don't they go and find someone else to break that monopoly?
- [33:57]
Robert Reedlove
Right.
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Michael Saylor
So energy and technology are a key part of the equation, but they're not the only part of the equation. Because if I want to generate hashes, I have to set up a bitcoin mining facility. There's physical nexus. I have to do it in Iceland or El Salvador or Canada or Texas. You could probably run your stake validator on a secret machine in your basement, but you can't run 150 megawatt facility on a secret basins. You need the support of the mayor, the county, the governor. You could look at this as a negative. It isn't. It's a positive. What it means is that bitcoin miners are knocking on doors everywhere in the universe and they're looking for supportive political jurisdictions. If New York City doesn't want to mine bitcoin, maybe Texas does, maybe Florida does, maybe Wyoming does. Right. And so if China doesn't, well, then maybe Kazakhstan does. In fact, the more irrational one country is, the more appealing bitcoin mining is to the others. Right. When China actually cracked down on bitcoin mining, the revenues of bitcoin miners doubled, the profits quadrupled, and the incentive to get in the mining business jumped. What you have is an interesting dynamic where bitcoin miners partner with energy companies and they partner with technology companies, but they also partner with political jurisdictions and politicians. This is an interesting situation too, because this is so Darwinian. What happens if you're a bitcoin miner and you set up a billion dollar bitcoin mining rig in New York City and then there's a new mayor and he outlaws bitcoin mining. What happens to your capital? You can't move it. Right. So bitcoin miners have skin in the game. And because they have skin in the game, that means that they have to do their due diligence and they've got a long time horizon. A person that's mining bitcoin is looking out five years, looking out 10. You want to be in a jurisdiction where you think that a decade from now you'll still be able to mine bitcoin. And so it forces you to be more thoughtful. And the next step is, well, I just invested hundreds of millions of dollars in this county. I guess I probably better contribute to the county election and get the county, the mayor elected. Right?
- [37:01]
Robert Reedlove
Right.
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Michael Saylor
You put down roots because you have a vested interest, because you have something to lose. So the bitcoin mining network Actually becomes a political lobbying network for bitcoin.
- [37:15]
Robert Reedlove
Interesting.
- [37:17]
Michael Saylor
And then every politician that has a bitcoin mine has tax revenue. When New York wanted to ban bitcoin mining, that was blocked by a politician because the politician got a letter from the union and the union said, we're going to lose jobs. So all the money that flows into creating mining centers creates jobs, creates tax revenue, supports politicians, creates massive revenues for engineering companies, for real estate companies, for landlords, you know, et cetera, it's good for the local economy. Bitcoin brings prosperity anywhere on earth. You might be a limousine liberal on the Upper east side and not like the use of electricity, on the other hand. But if you're living in the middle of Central Africa and if you have a volcano or you have a waterfall and 90% of your population is living below the poverty level and there is no industry and someone shows up and offers to give you billions of dollars if they can attach a windmill to your waterfall or turbine to your waterfall. How do you feel about the situation?
- [38:39]
Robert Reedlove
Yeah, yeah, it's, it's incentivizing everyone to interact with it in a way that, you know, contributes to and I would argue ultimately ensures its success. That that's the key. That's the thing that's so hard to get your head around here is like, it's not even, it's not something that's being imposed. It's really just, it's a game theory that's turned on people. So people, in a way, have become a core component of the bitcoin system. It's like at every level, we're incentivized to help it proliferate.
- [39:14]
Michael Saylor
100 megawatts is worth $300 million a year. Netflix is not going to show up in El Salvador and offer them $300 million a year in order to run a data center plugged into a volcano.
- [39:28]
Robert Reedlove
Right.
- [39:29]
Michael Saylor
Google is not going to show up in Zambia, Central Africa and offer them $300 million a year to run a Google data center. It's not going to happen. So what you have is bitcoin is hope for energy. It is hope for your semiconductor company, it is hope for your political jurisdiction. It solves a problem because it can go anywhere. It can go anywhere on earth with a satellite uplink. It's probably a more compelling solution to someone that has natural resources in a poor country even than in a wealthy country. What you end up with is a self distributing, dynamically distributing bitcoin mining network. And it is solved for the problem. Where do I find the Cheapest energy in a politically supportive jurisdiction. That's the problem you're solving for. That's not the same as the cheapest energy. It has to be cheap energy from an energy provider you trust and a political jurisdiction you trust. What's the answer? Well, the answer is a dynamic equilibrium. It's changing every single weak. Right.
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Robert Reedlove
Yeah.
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Michael Saylor
It was different three years ago. Three years ago there was free electricity in provinces that had empty excess coal electricity capacity in China. And so you could get effectively free energy. It was free, but it wasn't politically stable. Now you can go to a politically stable place like Texas and pay $0.03, or maybe you can get it for one penny in Kazakhstan, or maybe you can go some other random place. You could go to Cuba or you could get a bootleg thing in the jungle from some warlord. For how long? Well, the bitcoin mining network is continually distributing itself and it's organic. It's just like asking the question, when we settle around the earth, where should we settle that we will be able to make a living? And we won't settle suffer from famine or tornado. And the answer is, you don't know. I mean, until you've lived 100 years, you don't know that place. Floods. What's the likelihood of an earthquake in your favorite place? Well, you'll find out. So what happens? Well, the network distributes itself. Some people make good choices, some people make unwise choices. You know, this is back to antifragile or the like. You make really awful choices. You'll probably be put out of business within 36 months. If you make okay choices, you might last three to 10 years. And then maybe there are other choices where you'll be good for 100 years. But maybe you're better off to go to the place where you're good for six years, where the energy is one penny, instead of the place where you're good for 100 years, where the energy is five pennies. And maybe we could debate it and maybe you have an opinion we can argue to the cows come home. But what does it matter? It's better just to release the entire creature. Let the entire world work in a Darwinian Adam Smith evolutionary fashion, a competitive way. And often the lesson of the markets is the market is smarter than anybody.
- [43:08]
Robert Reedlove
Yes.
- [43:11]
Michael Saylor
Every time I think about what I knew, half the time I thought I knew it. And I was wrong. And sometimes I was right. But the market generally outsmarts the smartest person. So bitcoin mining is a dynamic market in security and it's balancing Energy versus technology versus political support. And that takes us to the fourth layer of security, which is. Go ahead. You got a question?
- [43:41]
Robert Reedlove
Yeah, let me ask you one question about that. It is shopping all of these dimensions, but it's also stabilizing them. And I wonder, does that apply to politics as well? Because it seems like this industry.
- [43:54]
Michael Saylor
It's a shock absorber. It is stabilizing. It's a political shock absorber, and it's an energy shock absorber. If you have a political regime and you've got natural resources, but your economy is tanked, bitcoin comes in. On one hand, the bitcoin Miner can generate $500 million a year in revenue. Okay. On the other hand, the bitcoin miner can say, we're not coming unless we actually feel this is a stable regime to operate in. So maybe you know how there's that phrase, like, you know, oh, I got married and my wife made me want to be a better man. I was like, okay, well, if you. If you get married, you can't. You have to give up some of your bachelor ways. Right. And if you have a child, you have to be even more responsible. Right. So the commitment to a family is stabilizing because you're thinking, you know, I just. I can't, you know, do the crazy things I did when I had no other responsibilities. If you actually don't have any industry, you have nothing to lose. And so a country that has a bitcoin mine has something to gain and something to lose. And if you were to actually then seize the bitcoin mine, no other bitcoin miners are coming to you. Right?
- [45:26]
Robert Reedlove
Right.
- [45:27]
Michael Saylor
It's the same as seizing the bitcoin. If you make bitcoin illegal in your country and you make mining illegal, then you lose all that. But if you make bitcoin legal or welcome and you make mining welcome, you gain something. And then if you're rational, you might remember that your prosperity came from the new job you have. And that way, you don't want to lose the job.
- [45:46]
Robert Reedlove
Right.
- [45:48]
Michael Saylor
If you're jobless and homeless, well, first of all, there's nothing to lose. And then if someone puts a $37 revolver in front of you, maybe that's more appealing to use that. If I have nothing, I might be more akin to violence or more prone to violence. And if I have, why do people resort to violence? Maybe because it's hopeless. If I feel like things are hopeless, I either kill myself or I kill somebody else. Bitcoin is hope. It is politically stabilizing. Because it's a way out for someone that can't find another way out. And once you adopt bitcoin, you see something that worked and you have something to lose. And you're part of the multinational bitcoin network. And that is civilizing in its own special way, because after the mining, it draws you into bitcoin holding and then bitcoin banking, and then bitcoin commerce and bitcoin philosophy and the like. Right.
- [46:58]
Robert Reedlove
So this, I mean, bitcoin mining, I guess we could say in a broader scope that digital technology is already changing the distribution of populations thanks to remote work and things like this. But bitcoin mining itself sounds like it could have a pretty significant impact on where people live. You're going to migrate to these cheaper energy sources and set up a politically stable environment and get to work.
- [47:25]
Michael Saylor
Yeah. Bitcoin mining lets you create an oasis of prosperity around a stranded energy source. If you have stranded raw materials, whatever the energy is, you can drop the miner on top of it, and then you can create prosperity because it'll monetize any flavor of energy, any frequency of energy, with no bandwidth and minimal infrastructure around it.
- [47:57]
Robert Reedlove
All right, guys, that was episode 14 of the Sailor series. And this episode we start to dive into a new framework that Saylor's laid out, which he calls the seven layers of proof of work security. And I think the easiest way to start this is with a visualization, actually. So Saylor's describing a monetary network in Bitcoin that self constructs these layers around it. And each layer is a point of resistance to disruption, I think is the big key point here. And this is somewhat akin to network effects. I think I've talked about this before, that the more participants there are to a particular network, which is to say, the more sides there are to a marketplace, the more resistant it is to disruption. The classic example of a one sided marketplace is Facebook disrupting MySpace. Facebook provided a superior value proposition to one cohort of users, which just are the users of the network, and in doing so was able to disrupt MySpace. However, when you look at a marketplace that has more than one cohort of user, something like Craigslist or ebay, where they have buyers and sellers, they. These two sided networks tend to be more difficult to disrupt because you have to provide a superior value proposition for both buyers and sellers simultaneously, otherwise no one moves. So this is somewhat akin to that. But I think the way Saylor puts us together, it's almost like this set of concentric spheres, I guess, surrounding bitcoin. And each Sphere is protecting it in its own unique way, insulating the integrity of its marketplace based on the incentives related to Bitcoin in a specific way. And the net outcome of this are these seven interlocking spheres that really protect Bitcoin from disruption and nurture the growth of its network. So this might sound a bit abstract right now, but as we go into it, I think it'll become a little more concretized. And the other general theme here I'd like you to think about as we start to go through this is that it is the persistence of Bitcoin. So the actual persistence of its network uptime, let's say, or its availability to sell energy into the network or to move energy through the monetary network and the certainty that it's affording market actors. Right again. Hard cap of 21 million can't be confiscated, inflated, stopped, interrupted. That is actually, in my opinion, in my view, forcing humans to reorganize themselves around this network. So in a very broad sense, we could say that all of the variation in human affairs, and this gets back to something Sailor and I discussed earlier, it tends to coalesce around the invariance. Saylor gave the example of gravity previously through the socioeconomic lens. We could say gold was this socioeconomic invariant historically that caused market actors to voluntarily adopt it and use it as an apolitical store of value. Bitcoin has just taken that principle of certainty and persistency and a monetary network to a radically new level. So that's another way to think about this. Is that almost like a stone thrown into a pond, but the stone representing certainty itself. And it's just propagating out into the field of human action and changing the way everyone does business. And it's not like something you can ignore necessarily. It's something that is so, so fundamental that if you choose to trade, which is to say you choose to participate in the economy, which is to be anything less than purely self sufficient, which is pretty much everyone, and you want to optimize for wealth preservation over time, which is pretty much anyone, I don't think anyone prefers poverty to riches. Then you have to pay attention to Bitcoin. You get sucked into its network over time. And I think this model that Saylor has provided in seven layers of proof of work security really pills back the layers, so to speak, on this dynamic and gives them a very specific mechanical description of how they work. So the first layer, and we only got into three layers in this episode and then next episode we'll get into the last four. The first Layer Saylor went into is the energy layer. And this is very important and profound that in bitcoin mining, for the first time in human history, we have this perpetual energy buyer worldwide. So anywhere there is a stranded or underutilized energy source, it can now be alchemized into digital gold, if you will. You can literally bring a bitcoin miner on site. There are very low bandwidth requirements. It just needs to be able to generate hashes to basically participate in the mining algorithm. And it can be used, it can turn this excess or stranded energy that otherwise couldn't be ported otherwise it was uneconomical to port this energy elsewhere due to its, its geographic location can now be used to directly monetize that energy, which they just turn that energy into money. The other big piece here is that if energy is intermittent, which is, say the production of it is volatile, like with wind or solar, Bitcoin mining acts as kind of a buffer for these variable supply energy sources. So if there's a, a huge surge in production and some laxity in demand, you could switch that to bitcoin mining and you could very quickly switch back as grid demand changes. So it's to say that bitcoin mining works really well with these interruptible loads and high variation loads and remote loads. So it's kind of like, and this is an example he uses later on, that it is providing this shock absorber quality where it's actually buffering different systems against volatility they would otherwise experience. So the analog example here is aluminum bauxite. And I think this was being done in, I want to say it was Greenland or Iceland, I forget which one. But they effectively had this surplus of, I think it was geothermal energy, but they had no good way to export it. What they would do instead was they would import aluminum and actually smelt it, which is a very energy intensive operation. And then they would smelt it with the local energy and then export the aluminum. Bauxite, I think, was the final product to countries that, that had demand for aluminum bauxite. So what this, this was an analog example of monetizing stranded energy sources like the stranded geothermal energy that for certain economic reasons couldn't be transported across power lines easily or cheaply, could now be aimed at the production of a hard commodity that could then be shipped anywhere worldwide. So the aluminum effectively was serving as an energy battery. And this is a pretty popular example, you've probably heard of this one before. The problem of course, is that it was very inefficient overall in that not only are you mining the aluminum in one place, shipping it to the place with stranded energy again, Iceland or Greenland, and then they're smelting it. So they're actually adding the energy as a value input to this commodity and then shipping it elsewhere. So it was kind of mired in these logistical costs and transformation costs in such a way that it didn't convert the energy into money with a high coefficient, let's say. So in Bitcoin we have something that requires less transformations every time you're either loading something up to ship it logistically or incurring a transaction cost. You're basically mitigating the efficiency of monetizing this energy. So with Bitcoin we have something that minimizes these intermediate steps and allows energy producers anywhere in the world to essentially directly monetize their energy sources. So it has a historical analog so we can say some things about it. But it is different in that it's now being monetized into this absolutely scarce token called bitcoin that can be transported globally 24 by 7 365, you have final settlement within an hour. In theory, you could use a stranded energy to create bitcoin in one area, beam the bitcoin to another area, and use it to buy local energy in a completely discontinuous jurisdiction on the other side of the planet. So it enables this very low friction way of transmitting energy across space and time. We have to be careful with the analogy here and not push it too far. But many have said, I think Saylor included, that bitcoin functions as somewhat like an energy battery or a monetary battery. And it's the first battery that's not, there's no leakage. Effectively we have slight impedance when we move across the network in terms of transaction fees. But we know with absolute certainty there's no unexpected inflation. So there's no leakage. Unlike something like fiat currency where there's just tremendous amounts of leakage, or even gold, where it's low, say 2% a year, but it's still persistent and continuous over time. Where we have to be careful. The analogy is that it's a one way battery, or like a write only battery. We can put energy, we can allocate energy into the production of bitcoin, but you can't shoot the bitcoin somewhere else in the world where there's no energy and turn it back into energy in the local environment. There needs to be a local energy market to turn your bitcoin back into energy, if that makes sense. So I think that's a very useful analogy and powerful way to look at it. Hopefully other energy producers in the world, I think they're slowly awakening to this, but it's still at the fringes to such an extent that people haven't really come to see the true implications of what this is going to do to energy markets worldwide. One of the great points, there's a lot of implications, but one that Saylor brought up, I had not thought of before was that energy producers becoming customers of bitcoin mining, so they're selling their energy to bitcoin miners. This is now converting them into political allies. Here in the US we have both regulated and unregulated energy markets with some of the regulated utilities. I mean, these are very large companies, multibillion dollar companies, very conservative, very old school. But as they become customers to bitcoin mining, I think these industries that have very deep roots, it's very localized, depending on the type of energy that's being produced. But typically oil, gas, solar, geothermal, hydro, these are all relatively fixed assets, let's say. So they're very tied into the local political framework because clearly energy is an indispensable commodity. It's like the ultimate commodity in a way. And so as they become customers of bitcoin mining, they're going to be learning more about this. Where your money goes, your mind follows, so to speak. And by virtue of their participation in this marketplace, they will become political allies that lobby on behalf of bitcoin, call their local regulator to get rules in place that are favorable to their long term capital interest, et cetera. So I thought that was really important aspect through which to look at Bitcoin. And that this energy layer, it's not just about thermodynamics and technology and money. There's also this political element to it which is another layer that we actually revisit here towards the end of this episode. So the second layer that Saylor brings up is technology. And everyone knows energy goes into the bitcoin network to secure it. This is the skin in the game of miners, effectively that underpins this Darwinian or capitalistic competition among miners to obtain transaction fees, block subsidies and participate in network security. So this is like this optimal alignment of incentives that Satoshi created that really makes Bitcoin bitcoin. Sayla brings up a great point here that we all know energy is very important to the network. But what's less obvious is that over time, as bitcoin grows, the network is rotating away from energy intensity, say an energy intensive security model, and towards a Technology intensive security model. This is something I had not thought about previously either. There's this shift almost occurring. If we think very early days of Bitcoin, people are just mining it on their computers. There's no specialized semiconductors at this point. It was just whatever computational hardware you had was pretty much competitive in bitcoin mining very early days. So it was mostly a matter of electricity, getting low cost electricity such that you could keep your operating expenses below the market value of the bitcoin, produce your operating revenues. So, so we could say in the earliest days of Bitcoin it was almost purely energy intensive. However, as the asics and semiconductors become more specialized, which is to say they become more narrowly focused and functionally designed for mining Bitcoin at the expense of everything else. These are single purpose units. That accumulation of hardware actually starts to represent more of the energy intensity overall of mining. So another way to think about this is that there's a shift occurring from dynamic energy to static energy. And we could say that the semiconductors themselves are effectively a form of frozen energy. This is capital. It was an energy intensive process to produce them, to ship them, to get them into position, plugged in and producing hashes, which is to say competing in the bitcoin mining network in a way that they are profitable. But this has effectively we are now capitalizing this energy cost into these semiconductors. So the technology itself, the hardware, is becoming more important, more of a security layer than the energy expense itself over time as the Bitcoin network proliferates. A lot of this has to do with that ratio where again, these ASICs are producing hashes more efficiently. So you're getting more hashes per energy expenditure, which is in the same way that capital amplifies the gains on labor. This technology is becoming more specialized over time and therefore more of a overall component of the security network of Bitcoin. And so this has a very interesting effect too, that it's drawing in more skin in the game for market actors. Because when you start shifting into technology intensive security model, there's a lot more capital, long term capital investment necessary to be competitive. So you need to have larger and more sophisticated capital operations versus just kind of plugging in and participating in mining when it's profitable and unplugging when it's not. This fixed cost of capital now needs to be amortized across more Bitcoin mining. And so the network is actually becoming more antifragile through these hardware cycles. So as each new generation of hardware comes online, that's more efficient than Its predecessors, the predecessor hardware is rolled out into locations that have cheaper energy, whereas the new generation hardware can go to higher cost energy markets and still be profitable because they're producing more hashes per unit of energy expended. And so that's powerful because instead of just pushing older generation hardware into the scrapyard, it's actually pushing it into other markets. So we're getting more decentralization from hardware cycle to hardware cycle. We're getting more hash power overall because you just have more penetration of the bitcoin mining network globally, and then you're ultimately getting more security. So this gets back into that virtuous cycle of bitcoin mining, which is as bitcoin network becomes more secure, Bitcoin becomes more desired as a store of value. As it becomes more desired as a store of value, its price goes up. As its price goes up, mining becomes more profitable. As mining becomes more profitable, more capex comes into the bitcoin mining network to secure, secure it, and so on and so forth. And this is that uninterruptible virtuous cycle that is Bitcoin's network proliferation. And no one's figured out how to stop it yet. So I thought this was just another good way to look at it. And we're kind of back to that. Bitcoin is a microcosm of capitalism. There's this very competitive game and market called bitcoin mining. And it is forcing everyone that's participating in an economy with money to kind of reevaluate their strategy. And that there's. And Saylor went through countless examples of this last time from Square needing to sell Bitcoin, or if a social media platform incorporated it, that other social media platforms would have to do it. So there's just this vortex or black hole like quality to Bitcoin that it's kind of radiating. It's pulling all industries and market actors into its vortex and forcing them to basically be more capitalistic in their approach, if that makes sense. So really interesting stuff to that point. You can't ignore game theory. This is not something you can turn off or wish away. It's an unstoppable force in the sense that all participants in game theory are operating in their best interest. So it's going to really dictate the direction of the marketplace over time. And since Bitcoin, there's, as Naval said, there's two ways to organize markets, either by freedom or by force, by prices or by coercion kind of thing. And since bitcoin's so resistant to coercion that I think we're really just seeing all of the free market principles that it represents being reinforced and radiated out into the broader economy. And so this gets us into the third layer, which is politics. So politics is that apparatus of coercion or force in most modern marketplaces. But with bitcoin, because it's so resistant, there's a different dynamic at play here. And Saylor makes the point that every time a regime is hostile towards bitcoin mining, you're just creating incentives for others to be accommodating. So you're basically all of this unstoppable financial incentive to work with bitcoin and accommodate its success. If a politician is drawing an artificial box around an area saying, we don't want that here, you're now pushing out all the best and brightest. The entrepreneurs, the tax base, the wealth, all the things that come with this wave of innovation get pushed out of that imaginary box. And so what you're basically doing is creating a windfall opportunity for competing jurisdictions. So this kind of gets into that sovereign individual thesis where nation states are now forced to compete in marketplaces basically as a result of digital technology, because the coercion is just not as effective. Which is another way to say that you can't have this coordinated collusion among states, which we could almost say fiat currency, is that everyone could debase their currency because everyone else was doing it and citizens had no other option. But with the introduction of another option, it's forcing all of these actors to become more honest in their dealings. And so every time one political regime pushes bitcoin out, they're creating incentives for others to take them in. This leads to a scramble, really, if you just play out, if you just game it out, that political actors will be scrambling to attract bitcoin miners and their tax revenues. And this converts bitcoin mining. Wherever bitcoin mining finds a home, it's now converting all the stakeholders related to that mining operation into a political lobbying mechanism, which Saylor makes a brilliant point there. All of these jurisdictions today were mired in debt. You're already seeing this, the fringes a little bit. You see the mayor of Miami and a few states in the US trying to be very accommodating to bitcoin. But I think this is only going to escalate as the true insolvency, or we could say poor solvency positions of many of these governments comes to the surface in that they're out of money, they can't leave any stone unturned. So to Speak. And it appears to me, as Saylor said, 100 megawatts is worth $300 million a year. These are massive numbers. There's a very large incentive for political structures that may be hostile to become accommodating over time. The net result, as Saylor said, it's a self distributing, dynamic and increasingly secure network. This is where I feel like we're very in the middle of the unstoppability of Bitcoin at this point. When you come to see the incentives operating in multiple sides, at multiple layers, in multiple ways, it becomes very hard to try and do some mental gymnastics into a situation that sees it failing almost because you have the willpower of every actor that wishes to preserve wealth aligned with the proliferation of this network. And so the other result of this that's really interesting is that it's a stabilizing force. We're bringing stability to energy markets as a buyer of last resort, as a monetizer of stranded energy sources. As Saylor said, this thing can be, Bitcoin mining can be an oasis of prosperity. So anywhere there's cheap energy, you don't need any other infrastructure really in place. You just need an Internet connection and bitcoin mining hardware and you can create digital gold, get the digital gold business. This also brings stability to technology industries as an insatiable source of demand for semiconductors. So now all the seasonality and fluctuations and risk semiconductors went through, they now have effectively a buyer of last resort as well. And the persistence of again back to the persistence of Bitcoin, the persistence of revenue expectations for semiconductor producers, this is going to lead to larger and deeper capital investments. Because as the Lindy effect of Bitcoin takes more and more hold and people expect it to be there over time. You can make larger capital investments based on the certainty of that revenue. And this will lead to again, deeper, more complicated capital structures, more investment, more roundaboutness of production, which is to say that we become more efficient in production, we become more aggregately wealthy as a result. So a lot of impacts here. And then finally, which is really interesting, is that this same mode, Bitcoin is bringing stability to political regimes. So those that offer Bitcoin miners the lowest tax frameworks and the most predictable legal frameworks, they're going to out compete those who do not. All the wealth, which again is hyper mobile in Bitcoin, the talent, the knowledge, the skills, the experience, all of these factors that make an economy vibrant, will flow into the jurisdictions where Bitcoin is treated best and it will relegate those that ignore this or resist this into the economic dustbin effectively. So it's this hyper competitive Darwinian dynamic that bitcoin's bringing to the geopolitical sphere that makes it seemingly unstoppable. This could lead to a lot of things. This could lead to incentives, I'm sorry, subsidies for bitcoin mining. It would make sense for states to subsidize these operations to get them up and running and attract local entrepreneurial networks into the fold. This is again increasing political stakeholders, skin in the game. So if they start subsidizing these things, clearly they're going to pass regulations that are favorable to them. They want to make sure that they preserve the local industry and the tax base that comes from that. Ultimately, I think if you game it out, you could see bitcoin as being a driver for more political consensus and that all of this gridlock that we see at the federal level today, when governments become more accountable to their bottom line, they're much more likely to reach consensus. That improves their financial position and moves them forward again, largely. That path forward I think necessarily goes through bitcoin mining and bitcoin production. My great hope is that as a result of this coercion resistant money emerging and it forcing all market actors to adapt their strategies to be more productive and less antagonistic because antagonism just doesn't work as well. That bitcoin almost encourages us or incentivizes us to rely on our reason, this objective, distinctively human faculty. We all have human reason over force. It's almost like maybe you could say it's simpler. Bitcoin's making force unreasonable. So in that way it is making civilization more sustainable over time. Less prone to booms and busts. And again the bust, typically the beginning of the bust is typically the breakdown of the monetary standard. Once you've compromised the most important protocol in a civilization, which is money. That tends to presage civilizational collapse as we've seen countless times throughout history. So bitcoin acting as a shock absorber in the energy, political and technology domains is really exciting frankly, and I am excited to see where it goes. I hope you guys enjoyed that. That was episode 14 of the Sailor series. I'll see you back here again soon as we dive into the last fours last four layers of the seven layers of the proof of work security model.