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TILP #3: What is Bitcoin - The technical side w/ Michael Schmid
82 Plays1 year ago
In this episode Jim is joined by/with Michael Schmid to get down to the brass tacks about the technical side of Bitcoin. They discuss what it is, how the technology behind it works, and many other questions that people might be asking.
Michael's Twitter : @Schnitzel
Articles to read by Michael: Schnitzel.world
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Transcript
Introduction to Intentional Living Podcast
00:00:00
Speaker
Hi, I'm Jim Kreider and this is the Intentional Living Podcast where we have conversations about how to use your resources, your time, your money, your talents for what's important to you in life in an efficient and effective manner. I'm glad you're joining with us today and I look forward to this journey with you.
00:00:24
Speaker
In today's episode, I'm joined with Michael Schmid. Now, Michael and I, we talked through a whole lot today.
Understanding Bitcoin: A Practical Perspective
00:00:30
Speaker
It's a great, great conversation, unveiling and de-mystifying what is Bitcoin. Not on the monetary side of things, not on the theoretical, but on a practical standpoint from the computational side. What is this? Michael does a great job breaking it down in a very simplistic manner that someone like me can even understand.
00:00:53
Speaker
If you wanna learn more about Michael, you can follow him on Twitter at schnitzel. All right, I don't wanna give intro too much about who Michael is or what he does. You'll learn plenty of that in this episode to come. So let's get started. All right, hey Michael, thanks for joining me today. I appreciate you being here and I'm excited for our conversation.
00:01:11
Speaker
Same, same. Thanks for having me. Yeah, for
Michael Schmid's Journey and Early Bitcoin Days
00:01:14
Speaker
sure. Well, I guess before we dive in, why don't you go ahead and introduce yourself and who are you and what do you do and why would I have you here for a podcast?
00:01:24
Speaker
Cool. Thanks. Yeah. My name is Michael. Based on my accent, probably your listeners can tell I'm not from the US. I'm originally from Switzerland. I grew up there, but was always interested in the US, specifically the tech scene, and then had the opportunity around seven, eight years ago to move to the US, lived in Austin a couple of years, decided at one point that Austin is
00:01:48
Speaker
was cool, but I want to see more than traveled all over the US in an Airstream trailer, which was really nice to actually learn a lot about the country that I didn't know a lot and also learned that a lot of the things that we learned from the media and the press is completely wrong.
00:02:04
Speaker
And so did that for a couple of years. And now I live in Virginia in a small town in the middle of nowhere among 400 other people, which is another new experience because I always lived in big cities before. But I'm really enjoying it. It's really cool. Yeah, my Bitcoin story. I started quite early. I think my first interaction I had is like 2011.
00:02:28
Speaker
where in the tech scene in Zurich, there were people really excited about this new technology. The problem was I had no idea how broken our money system is. Coming from Switzerland, it's pretty cushy. You don't have to worry much about 401ks and things like that just because the government takes a lot of this for you and also
00:02:53
Speaker
inflation and stuff is just not a big issue. But only after I now moved to the US, so like in 2019, 2020, I realized how important Bitcoin is for us, from a monetary point of view, because technically, I understood it from the beginning. But what I knew about it for a long time, but only when I learned about the money part, I really fell into the rabbit hole and went all in full in. Thanks.
00:03:19
Speaker
I didn't know that about you with the Airstream. That's pretty awesome. Where were some of your favorite places you explored during that time?
Adventures Across the US and Settling Down
00:03:28
Speaker
That's a good question.
00:03:32
Speaker
I think the places that we will really buy completely by ourselves. One of them was like Joshua Tree National Park. There's a lot of BLM land, so the Bureau of Land Management, which is owned by the government. And you can basically just stay there for up to two weeks in the middle of nowhere. So you literally like, there's the highway and you go to an exit and then there's like gravel road and you just drive, drive, drive.
00:03:56
Speaker
And you just hang out and we basically cooked every night over fire. We saw stars, our dog just ran around off the ashtray because for two weeks we saw nobody else, like not even a car of somebody else. And just that was really, really cool. That's awesome. That would, yeah, I used to try to get Kendra, my wife, to
00:04:18
Speaker
travel, live out of RV for a bit, but then we kept cabin kids and now we have four kids. I think it's, they'd be really tough to live out of an RV with our family. It's doable, but it's not people that do it. It's, it's quite a zoo. It's a lot going on, but, um, yeah, it's, it's a different life. Like we now realized now that we're working on or planning on children and having more dogs. Um, it's also nice to have a house.
00:04:50
Speaker
Yeah, there's there's romance in the non traditional lifestyle, but there's also, you know, practicalities with a practical normal lifestyle. So yeah, yeah, right now live vicariously through others. But they may be nice.
Innovative Home Mining: Bitcoin for Heating
00:05:05
Speaker
Yeah. Well, hey, I wanted to have you on this you have the you definitely have a different way of doing Bitcoin and just experience and hands on relationship with Bitcoin far beyond
00:05:20
Speaker
my personal technical prowess, but then also with really anyone else I've talked with.
00:05:27
Speaker
From a just understanding the technology behind it how it works and actually you know working with it on a regular basis you want to go and just tell Tell us a little bit about like things that you've done talked to us about like Your your mining and home and everything and then we can we can talk through like from there really well I want to get to today is talking with you about Like what is Bitcoin not on the monetary side? Necessarily, but like actually how does Bitcoin work? You know there's there's a lot of
00:05:54
Speaker
confusion around not only the Bitcoin is it's a lot in a lot of facets. It's we're trying to tackle economics, monetary, but also trying to tackle like coding and energy policies. Like there's so many things tied up in here. And we've spent some time in the last few weeks talking through the monetary side.
00:06:15
Speaker
And that still leaves this gaping gap that I certainly am not sufficient to fill with, like, how does it actually work? The computing side, the code, sort of the history behind that, like why Bitcoin, the security of it. So I'd love to hear that. Before you go there, like, I feel like you maybe talk to the audience about why you'd be a good person to talk with and some neat things about what you do from a physical standpoint with Bitcoin. Yeah.
00:06:43
Speaker
Yeah, for me right now today that I mostly work in Bitcoin, it has also to do with mining and the specific case of mining, which means home mining. And if you try to mine at home, one of the problems is that we all very have very high electrical costs compared to like industrial rates.
00:06:59
Speaker
And so mining only becomes profitable if you start to use the mining for something else and just creating the Bitcoin. And that's in my case is using the heat. So what I'm doing is I'm heating my house, my hot water and the hot tub completely with Bitcoin miners. Which basically means that these miners, they generate a lot of heat because a computer, any computer converts 100% of the energy you put in.
00:07:28
Speaker
it actually comes out as heat. And as soon as I realized that, I could not stop and thinking about how can I reuse this heat. And so how it technically works is you actually put the miners into oil, you heat up the oil, and then because you have it inside the liquid or you have the heat as a liquid, you can then transport it throughout your house, you can convert it into water. And so that's basically the technical way how it works. And that then becomes the
00:07:57
Speaker
calculation of is this profitable, which everybody is asking all the time, becomes so much a different discussion than like these really big miners that for them, the profitability is purely the Bitcoin that they mine with the electricity. For me, I now generate two things. Yes, I generate Bitcoin, but actually way more important is I generate heat. And in case of, let's say, the water that I would have heated anyway with electricity, the electrical cost that I have is one to one the same
00:08:27
Speaker
from before where I had the regular water heater to now the Bitcoin heater because I want a shower anyway. And so all the sites that are generated are now completely free. Like any sets that is generated through this mining system do not cost me any additional electricity cost because I've paid them already. So that's the big part. And I've been working on this now since two or three years just for myself.
00:08:56
Speaker
because I was wondering if it's possible and I believed it's possible. And so I spent hours and hours in learning about immersion, about different tubing systems and mining itself and all the different things and have put this on Twitter. And people are super excited about this because people that realize that you can now for the same cost, suddenly generate free sets, they want to do this. And so what I'm working on now is actually creating as much content
00:09:24
Speaker
for people that want to do this themselves. So that it's like open source, videos, build, um, cysts or like in, in instructions on how to build the systems by yourself, but also, um, thinking about how could we actually create kits or plug and play solutions that we can send to people's houses that they can plug into their house and also mine their house or heat their house with mining.
00:09:51
Speaker
Yeah, that's incredible to think about.
Technical Deep Dive: Bitcoin's Architecture
00:09:55
Speaker
As I mentioned to you about a month back, being in Texas, heat is not much of a concern, but what we're looking for is cooling. So I would love one day if you can figure out how to take that hot air. You explain it to me in a
00:10:12
Speaker
dumbed down manner so I could somewhat explain it, how it is technically possible to take that hot air and convert it to cold air, basically just how like AC systems do it. So if you can crack that one from a Bitcoin mining perspective, I think the state of Texas will be eating out of your palm. Yeah, no, that's actually one of the next things I'm working on because funny enough, in the Airstream, we have a fridge and the fridge runs on propane and the propane can only generate heat.
00:10:38
Speaker
So there is physical possibilities to convert the heat back into cold. And so I'm literally scouting eBay right now for like some of these fridges and try to find one and connect it to my Bitcoin miners to, in the end, not cool the whole house yet, but at least the beer or some other fridge beverage that we want to cool down through Bitcoin mining. And just as a proof of concept, but of course with the very, very end goal to maybe cool complete full houses with Bitcoin mining.
00:11:06
Speaker
That'd be amazing. Well, let's so let's take it back now from your heating your house and your hot tub and your water with Bitcoin miners. Let's just talk through, again, the side of things that I know the things I'm smart at, which is it's easy to keep track of because there's not money of those. And I know a lot of things I'm not very smart at. And one of those many things is just more of the technical
00:11:30
Speaker
computers and like, yeah, just simple things. I mean, frankly, it's where people are like, I don't understand Bitcoin, so therefore I won't use it. It's like, dude, I don't understand how most things work. Like you and I were thousands of miles away, but yet we're seeing each other and talking in real time. I don't know how that works. That blows my mind. I couldn't begin to tell you how I can see you right now, but I still use Zoom or a phone or a picture. I don't know how a camera works. And that's nuts. I couldn't explain it to you. So let's take those are things we're used to. And I think a lot of
00:12:00
Speaker
using something that you don't understand, um, you either have to, you either have to be so normal that it's used that you don't even think that you don't understand it. Like, you know, people use cameras and phones and stuff all the time. And most people don't understand how they work. It's just normal part of life. So you're okay with that. But to begin using something that's abnormal or at least currently abnormal to be comfortable with utilizing it, it helps to understand at least at a base level what that thing is or how it works. It's sort of,
00:12:31
Speaker
You know, it it pulls back the curtain on the mystery of the what ifs and brings in a lot of comfort. So if you want, let's just let's talk a little bit now about like, what is Bitcoin? What's the computational side of things like these terms of mining and hash rate?
00:12:50
Speaker
and nodes or like, I mean, in the nineties, like this is, this is not something new, like a peer to peer trustless permissionless money system is something that wasn't traded in 2017 or 2018 or even 2008, 2009 by Satoshi Nakamoto is something that people have been working on for decades. Um, so let's just, let's talk through those things like why and what and how and all that fun stuff. Yeah, no, happy to do so.
00:13:17
Speaker
Yeah, I think the most important thing as you just mentioned is Satoshi, the creator of Bitcoin, he didn't come up with all the technologies or the different things that we're using today in Bitcoin. What he did or what they did, whoever that is, they combined existing tools very cleverly and added some things on top of it that solved some of the problems that these other tools had.
00:13:45
Speaker
that they failed. Like you correctly said, since the very beginning of the Internet or of any digital communication, people have been wondering, how can we send money or how can we transport value between one person and the other? And that's actually how I ended up in Bitcoin. And we at the time in like 2011, all we talked about is digital scarcity.
00:14:10
Speaker
And what this means is that Satoshi figured out a way how I can send something to you, Jim, without me using it anymore. While the whole internet, everything else about the internet up until their point was about copying something very simple. So like content or a picture or music, like Napster, like all these technologies, they all created something where in the past, let's say you want to copy a Bible.
00:14:38
Speaker
First, you needed somebody that wrote it a second time. Then people figured out how to print books. But still, there was physical labor involved in printing the book and transporting it. And then the internet came and said, you know what? There's a PDF. I can send it to you. It's basically zero physical cost for anybody. And so it was all about transferring knowledge very fast and copying knowledge very fast. And now the problem is, though, with value, specifically if you want to have
00:15:09
Speaker
a stable amount of anything, you want to ensure that if I send you something that I cannot use it a second time, that's called double spend. That means that if I send you a specific amount of Bitcoin, I cannot spend it anymore. And the system Bitcoin figured that out. And I think that is called digital scarcity. And interestingly, Satoshi, there are references that
00:15:34
Speaker
that they say, look, this could actually be used for other things as well. It doesn't have to be only used for money. But it obviously makes a lot of sense to use it for money, because that's the thing where we store value in, we store value in money. And so if you have a way to have digital scarcity, to use it for money and to transact. And that's basically the crazy invention that Bitcoin is, is digital scarcity. And everything around follows after that.
00:16:03
Speaker
But yeah, I think that's really the part that in 2011 when I saw it the first time was like, oh, wow, we have never seen this before. And that was the big invention from Satoshi.
00:16:18
Speaker
Yeah, that's I was I was actually talking with someone earlier today and they mentioned they're just saying it's it's interesting someone was able to create a money itself through Bitcoin. The thing is, Bitcoin itself, I guess we treat it as money and it is money, but it's base sense. It's not like someone went out and created a currency in the way that we think about it. They created a line of a line of code
00:16:44
Speaker
That allows for digital scarcity that can then can be transacted and utilized as a form of money. So it's not like they, you know, Satoshi did create money that's white papers about that, but it's not.
00:16:58
Speaker
It's not, we're not looking at money in the sense of how we view money in its sense of like, you know, like I have actually right in front of me from a conversation earlier, a $50 trillion in Bob Wayne note, or, you know, US dollars, we think of money as this
00:17:16
Speaker
is a currency is a piece of paper that's backed by something. That's not what Bitcoin is. It is a means of digital scarcity that can be utilized as money could have other functions. But if you think of like, you know, important things in life, money is very important, maybe more or less to you, subjectively, but objectively, having a means of communicating, storing and transferring value across space and time is really important. And so that's a, you know, it's a
00:17:46
Speaker
first primary base of what is something that can be utilized from this technology. So yeah, that's when I'm trying to communicate with people, sort of some of the issues that were having trouble getting cracked through other cryptocurrencies. And now like the term cryptocurrency has been hijacked. Or, but really, we're talking like just cryptography and currency. So crypto cryptographically, back money.
00:18:14
Speaker
And that they used to be that's a pure thing. And it's in a sense, but it's been hijacked by everything else that comes along with the baggage of cryptocurrency. But with with these, I mean, this is something that's been tried to tackle for for over a decade before
00:18:29
Speaker
Satoshi came on the scene and one of the problems when I try to relate to people in my simple mind is like if I send you Michael an email I retain a copy of that email and then you have a copy of that email so now we've duplicated this and Bitcoin was somehow to make it able to make it where I send you that Bitcoin I no longer retain this this copy of code and you have it and not only that but we're also not counting on this
00:18:53
Speaker
trusted third party or me individually or you individually to keep a safe ledger that the transaction took place, but rather that transaction is then signaled to everyone else in this ecosystem to keep a ledger
00:19:08
Speaker
Um to verify what transaction took place that jim sent this email to michael and I could I could say no I never sent that email but everyone else received a signal to know that took place and y'all can verify it And basically the greatest number of verifications wins and y'all can march on and assume that that actually took place because y'all are able to verify that that's Very simply how I put it. But uh, I guess let's keep pulling. Let's keep pulling those strings so
00:19:36
Speaker
Do you feel like Satoshi Nakamoto, for those who are listening who don't know who that is or what in the world we're talking about, Satoshi Nakamoto is a person or people or entity. No one knows. That's something you have to come to terms with. We don't know who this is. You can't get hung up over that. Frankly, I don't know who invented the wheel, but I still use it all the time.
00:19:55
Speaker
Yeah, you know, if the person who invented the wheel came and was able to prove like, Hey, this is me, I invented the wheel, you know, we don't have a lot of appreciation. But if that person came and said, Hey, I've thought about it in circle wheels have been great. But I really think that square wheels would be better.
00:20:11
Speaker
know, if they could really prove they created the wheel, I think we'd all just like out of a sign of respect, say, all right, we'll hear you out. You know, if I said I want square wheels, everybody like dude beat it. But if he if the wheel creator came out and said, I like square wheels, we say, Look, I don't think it's gonna work. But we'll hear you out just out of out of respect.
00:20:28
Speaker
But they could do nothing to change wheels that are used into squares, instead of a circle, beyond anything more than you could or I could. They'd actually have a convincing argument. So if the Satoshi Nakamoto person comes out as an individual that you like or dislike, or an institution that you like or dislike, that doesn't actually mean that they have any more control
00:20:50
Speaker
or less control than any other individual or group or entity over how bitcoin works moving forward and you have to be you have to come to terms that that's okay so with that said so Satoshi Nakamoto they wrote this white paper basically with a lot of stuff that i'll understand i guess Michael if you want to talk to us like sort of what was in that white paper what made it important and any key pieces of that paper or just the initial like hey here's bitcoin here's what it is what made that special compared to the
00:21:19
Speaker
thousands of cryptocurrencies that exist now, or even the things that were trying to be created up to that point. Yeah. So the big thing that Satoshi Nakamoto came up with is the complete decentralization of the ledger. Before Bitcoin, there were digital cash systems that always relied on a central entity to actually confirm or deny a transaction. So that's basically a bank.
00:21:47
Speaker
where I will send money to Jim, what I actually do is I go to my bank and tell the bank, please send money to Jim. And because we both trust the bank, we trust that the bank has, you can imagine this like an Excel spreadsheet that says Michael has one Bitcoin, Jim has zero. And then I say Michael sends one Bitcoin to Jim.
00:22:08
Speaker
And then in the end, it says, Jim won Bitcoin and Michael won zero Bitcoin. And anytime we can go back to the bank and saying, hey, bank, how much Bitcoin has Jim? And then bank says, Jim has won, Michael has zero. And because we both trust the bank, this is how we can transact. And people recreated this in digital ways, but there was always this central entity. And that's what Satoshi
00:22:34
Speaker
figured out a way how to not do this. And how he did this is basically first, he created a global ledger. So instead of having, he said, instead of having a central entity that keeps this ledger, let's give everybody the ledger. And that's one of the things that I think a lot of people don't understand is if you have a Bitcoin note, which is basically that Excel spreadsheet, you have every single transaction that ever happened in Bitcoin is in that ledger.
00:23:03
Speaker
And the other interesting thing is it actually doesn't say Michael zero, Jim one. It just has every single transaction in it. So the tally and the end that says how much Bitcoin does one specific person or address have is never actually stored. It's only every single transaction. And so with that, we basically have a way that I can confer, I can verify, and you can verify that, um, that you have one Bitcoin and I have zero Bitcoin.
00:23:36
Speaker
Yeah, I don't know how I would begin to even create that. When I was in probably sophomore year of high school, I took a coding class and I was proud when I was able to make like a stick figure.
00:23:55
Speaker
Yeah, when I think of me doing anything technology wise, I think of on the office when Creed wants to create a blog. So they actually just give them a Word document that he types on. It's connected to nothing. He's just on Microsoft Word. That would be me trying to make anything like this. And actually, what is funny enough, this is all peer to peer. So if you have these spreadsheets or
00:24:19
Speaker
These Bitcoin nodes, as we call them, that keep the ledger, they all talk to through peer-to-peer, meaning there's no central entity again. It's just every node connects to five, six other nodes, because not every node connects to everybody else. They just create a massive network of nodes that are peer-to-peer connected, and that technology, again,
00:24:44
Speaker
Satoshi did not invent this. Mapster brought this already up. That's a technology that we knew way from before from doing illegal things, where people figured out these peer-to-peer protocols and how these tools can find each other, can communicate with each other, can also handle bad actors, things like that. So that's where the peer-to-peer. And how this basically works is whenever you want to do a transaction, or let's go back to the transaction, I want to send one Bitcoin to you, what I do is I
00:25:14
Speaker
transmit this transaction to let's say my other seven nodes that are connected to me and they will transmit to all the other nodes and the other nodes and the other nodes that at one point you can reasonably assume that all the nodes have received this transaction at one point. The problem is though, how can we assure that after I transmitted this transaction that I sent one Bitcoin to Jim
00:25:43
Speaker
How can we ensure that I not suddenly say later, oh, no, no, no, by the way, that was a mistake. I now send the Bitcoin to Ruth. And so that's because you don't have a central entity. Now, the bank would say, no, wait, Michael, you sent the Bitcoin out of the dream. You don't have it anymore. I'm sorry. But if we don't have a central entity, we need some other way to ensure that you cannot change
00:26:12
Speaker
suddenly rewrite the past that I cannot go in there and saying, oh, by the way, now I sent one Bitcoin somewhere else or my Bitcoin is now suddenly at Ruth's place and things like that. And that's where the blocks come in.
00:26:27
Speaker
See, I was about to bring that up, because there's these phrases that have become gimmicky, and that I actually stay away from, despite how much of my time, both personally and vocationally, involves Bitcoin. I avoid so much of the terminology that is so related to Bitcoin, yet is just mixed with other things. So one of those being cryptocurrency. I never say the word cryptocurrency or crypto, just because it has
00:26:55
Speaker
Like I'm a Christian, but I don't really talk about like religion that often because the connotations of religion has baggage when Christianity is it's a religion. But I don't throw around that term just because the baggage come along with it. So like cryptocurrency, I don't use that term. Another one is blockchain. You know, blockchain is such a
00:27:17
Speaker
buzzword and no one really knows what it means. You have companies who are putting everything on the blockchain, which can you talk to us about that? Like have, has anything that you've talked about thus far is any of this related to the blockchain? Like have you already spoken to what the blockchain is? We just haven't used that word yet. Or is the blockchain something else? So the blockchain in its simplest form is basically a distributed database where, which allows you
00:27:47
Speaker
to store data in a lot of different nodes or places or computers where together all these computers can agree what actually the history is and you cannot change the history.
00:28:05
Speaker
So you mentioned earlier these Excel spreadsheets that I can keep and you can keep instead of having a bank keep. So is the blockchain essentially all of those verified, the grouping of verified Excel spreadsheets in one spot and then as, and from my understanding, basically as a new spreadsheet is created, we add that to the block. It's a chain of blocks. Is that remotely correct?
00:28:33
Speaker
Yeah. In a very dumb, dumb manner. Yeah. So the problem with these distribution systems, we need to ensure that if I send you one Bitcoin, I cannot suddenly a week later come back and say like, oh, by the way, no, no, actually that Bitcoin is now with with person C. Let's say that's Ruth. And the blockchain solves this with all the transactions that happen within 10 minutes.
Decentralized vs Centralized Systems
00:28:57
Speaker
So let's say I send you a Bitcoin.
00:29:01
Speaker
And that transaction, Michelson's Gym 1 Bitcoin is added. Let's make this from just being a hypothetical. Why don't you go ahead and send me a Bitcoin real quick. I have a testnet. I can send you a thousand Bitcoin if you want, but I don't have any value. So we take all the transactions that happen within 10 minutes. So everybody else that also transacts, we take all these transactions together. And yes, we put them on one spreadsheet.
00:29:30
Speaker
and all together. And then we take a so-called hash of this spreadsheet. So that's like a checksum. We basically calculate and we say, okay, this spreadsheet has a checksum seven. Now, if one person would change a tiny bit of information, like let's say, I would say, I will send you a two Bitcoin, the checksum will change, meaning that the seven changes into a nine. And then what we do, we create a new spreadsheet
00:29:59
Speaker
And we put the number seven, that was the checksum of the first spreadsheet. We put it on top and we put the seven in there. And then we gather all the other transactions of the next 10 minutes. We put them all in there and they have a checksum, let's say 12. Then I create a new spreadsheet and I put the 12 on top of it.
00:30:16
Speaker
Now, this goes on and on and on. This happens every 10 minutes. Now, if I come a week later and I say, hey, Jim, by the way, the Bitcoin that I sent you, I already sent them to Ruth over there. You can go back and say like, no, no, no, no, look here. This spreadsheet says Michael to Jim. And then I say, well, no, no, no, it actually says my version says Michael to Ruth. And then you can say, well, show me your checksum. And then I show you, you show me seven.
00:30:45
Speaker
Let's say my checksum is nine and then we can look in the next block and then we see the checksum seven in there. And my checksum nine is not in there. So the blockchain basically ensures that we can agree on a specific history. And if ever anybody claims that something in the past was different, everything else needs to change. So in order for me to change something in the past, I not only need to change that single spreadsheet,
00:31:12
Speaker
that entry, I need to change every other spreadsheet or every other block that I also need to go and change. And that's impossible. That's just so much work that this would not be possible. There is a chance, though, and we can go into that. And that's where the miners come in. But that's basically what the blocks ensure. The blocks ensure that together we can agree on the history. And what is interesting, and that's where maybe some people have heard, oh, you need to wait for six confirmations.
00:31:42
Speaker
it's actually easier for me to change something that just happened like one spreadsheet ago or two spreadsheets ago than changing something that happened a thousand spreadsheets ago. So that's why sometimes you say, hey, let's wait a couple of confirmations or blocks to actually assume, because what could have happened is that when I sent you that initial transaction,
00:32:08
Speaker
Because there's a completely node, like all these nodes that are loosely coupled with each other that need to all agree what the next spreadsheet is, maybe half of the nodes have not received my transaction yet. And they actually in the spreadsheet that they generated, my transaction is not in there. So I need to wait a bit for the system to actually be able that I can trust it that my transaction that I did has been seen by every single node and has been added to the spreadsheets of every node.
00:32:39
Speaker
There's, I want to take this a lot of ways. Let's while, while we're, I want to go back like three points ago, right? Quick. You're talking about, we could, we could have.
00:32:50
Speaker
a bank as the centralized party that we reference for transactions in their database. So they are the spreadsheet keeper. Why is having a decentralized, these group of spreadsheets, why is that better than a centralized party? Why is that better in some instances? Maybe like I would argue in the case of Bitcoin, so money, yet it's not better for other things. Like if it's better,
00:33:20
Speaker
Why don't we put everything on a blockchain or everything on a decentralized ledger if it's better? You want to talk to us about that right quick? Well, basically, decentralized ledgers are very slow, very compute intensive, and not optimized at all. And so that's actually one of the things that when I looked at the very first time in Bitcoin, we realized that you can do three to four transactions a second.
00:33:47
Speaker
because you need to wait these blocks or these spreadsheets. They have a specific amount of rows. So if you have more transactions,
00:33:56
Speaker
Just like the newest rows, they have to wait for the next spreadsheet or for the next block to get in. So it's a very slow process and very compute-intensive. All these nodes, so every Bitcoin node stores today around 600 gigabytes of data. And every node stores byte for byte the exact same data in all these hundreds. I think we estimate we have like 200,000 Bitcoin nodes today. So there's 200,000 Bitcoin nodes.
00:34:26
Speaker
that all store 600 gigabytes of exactly the same data. Like if you tell this to any technology person that tries to make optimized fast systems, they're like, this is complete stupid. Like just store it once, agree which of the one is the main one, and then the other ones you can store it for something else. So these decentralized systems are very, very, very inefficient, but they're very trusty because there's no single entity
00:34:56
Speaker
that can suddenly go in and saying, oh, by the way, Jim, you didn't pay your taxes. So let's off this off this whole Bitcoin that you have now half of them you don't have access to. Or this transaction actually never happened because Jim, we don't like you anymore. And we have numerous and thousands of examples of this where with the current fiat system that relies on decentralized entities, aka banks,
00:35:21
Speaker
where suddenly people get kicked off and people suddenly have less money on them because there's a computer bug or things like that. So it's inherently really bad, but it's very efficient to have it centralized. But that's what we want with Bitcoin. The layer one, and maybe we can go into the different layers a bit later, but the layer one is inherently very, very slow, but that's a good thing.
00:35:46
Speaker
Yeah, that's that's one of the biggest critiques of Bitcoin. There's a lot of them. We can get in some of those in a bit.
Mining Mechanics: Consistency and Profitability
00:35:51
Speaker
But but one of those being it's inefficient, which I would agree with. There's this there is a.
00:35:59
Speaker
in anything in life, there's going to be trade offs and opportunity cost and a trade off with Bitcoin and it's decentralized manner is the efficiencies or lack thereof. So other cryptocurrencies, as mentioned earlier, there's thousands of these other things and we could, you know, that's a lot of the sales points of these other cryptocurrencies is it's more efficient. It's it can process more transactions or it's easier. It uses less computing power than Bitcoin. Why is
00:36:27
Speaker
Why is that not a worry, the inefficiency versus the efficiency of these other cryptocurrencies? Because in order to really do it decentralized, we can only do it in an inefficient way. As soon as you want more efficiency, you will add some kind of trust into the system.
00:36:49
Speaker
And trust means that individual people will be trusted by others. And then these individual people suddenly have an incentive to play some games. Like that's what we see with governments. There is no government in the world that has not the corruption. Like if you are the person that decides who gets a driver's license, how fast, of course there is an incentivization automatically to say, well, if you pay me a little bit more, I will just put you one
00:37:19
Speaker
One like on the staple of all the drivers license applications, I will just put you on top of it. And then like, yeah, you just give me a little bit of dinner or whatever. You invite me to your boat or you pay me a whole yacht, like whatever it is. That's humans. Humans are inherently not fair.
00:37:40
Speaker
because humans think about themselves. Again, this is all a good thing. And the problem is, if we do this, if we let individual people decide about others, that's when these things come in. And that's where Bitcoin writes it into code, lets machines, which inherently are not unfair, they just execute the code. So if we write fair code and give these computers all the same code, we can create a system that is very slow, but very fair.
00:38:11
Speaker
Awesome. Yeah, it's perfect. And obviously you mentioned earlier the layers and everything. We can go there in a bit. Here's something. You earlier talked about how you do home mining with Bitcoin, but since then you've used the word node a lot as a means of verifying transactions. Can you help me understand the difference between a node? What is a node? Running a node, what does that mean? And what's the difference between
00:38:37
Speaker
a node in mining or like what takes place in running a node or the applications of that versus mining. Yes. So as I said before, we want to the nodes keep all these spreadsheets or these blocks. And they basically synchronize themselves. They store the transaction history. If you want to know, hey, Jim, how much Bitcoin do you have or Michael, how much do I have? I need to go to a node that has the complete transaction history.
00:39:05
Speaker
But what I also said is we want to make sure that every 10 minutes, a new spreadsheet is generated. Now, how do we do this? In the internet, where everything is in real time, where everything is super fast, where we literally invent new fiber optics to send data as fast as possible between different continents, we need to find a way that something happens every 10 minutes. And that's where the miners come in.
00:39:36
Speaker
Bitcoin has a way to enforce that the spreadsheet is only coordinated roughly every 10 minutes. And important here is roughly, it's not exactly every 10 minutes. And how it does that is that the checksum that I mentioned before, the 7, the 9, and the 12, Bitcoin actually says, or the network says, the checksum, let's say, needs to be 5 of this specific block.
00:40:03
Speaker
Now, if you take all the transactions in that spreadsheet and you generate the checksum, there's, let's say there comes a three out. And that means the Bitcoin network says, no, no, no, it needs to be a five. Now, in order to change the checksum to a five, the only way is to add some random number.
00:40:22
Speaker
Bitcoin calls it nonce, number used once. And this number, you add to the spreadsheet at the end, and you generate the checksum again. And then maybe let's say a one comes out. So you change the number to something else, and you generate it again, and a two comes out. And the interesting thing about these checksums is you cannot predict or you cannot go back. So you cannot say, I have all these numbers, and I have a five. Tell me which number I need to add to generate the five.
00:40:50
Speaker
The only way to do this is just to randomly test the 1, the 2, the 3, the 4, the 5, the 6, the 7 until you have to check some number 5. And what is really clever, Bitcoin has a way to predict all the computers in the world that are basically guessing this number, that roughly every 10 minutes a block is found.
00:41:17
Speaker
The act of trying to find these numbers is called mining. So basically, when I have a miner at home, what this miner does, it takes all the transactions in the last 10 minutes. It takes them together, creates a block, runs the checksum. And now the checksum doesn't says five. It actually says the checksum is 30 characters long. So it's an extremely big number.
00:41:47
Speaker
But the Bitcoin network says the checksum for a block in order to be valid needs to start with a specific amount of zeros. And what I do then, my miner, just takes all the transactions in the block, generates the checksum and says, oh, it starts with a one. So this is not a valid block.
00:42:06
Speaker
So I will add a nonce. Again, this can be a random number and I just do it again and again and again. At one point, this 32 length number will start with a specific amount of zeros. And that means because the Bitcoin network says currently it needs to start with a specific amount of zeros, I find a valid block. And the really crazy thing is that the Bitcoin network can predict based on how many computers or how many miners are there in the world.
00:42:36
Speaker
It can predict how hard or how many zeros at the beginning of this hash or this checksum needs to be to create it roughly every 10 minutes. And that's how the Bitcoin network can ensure that we generate a spreadsheet every 10 minutes and not every one minute or two minutes or five minutes or every hundred minutes, but roughly every 10 minutes.
00:43:05
Speaker
And that's another thing that Satoshi invented, this difficulty, which is basically says how many zeros that it has to be in front. That's something that they generated that didn't really exist before. That's in those, another term that I hear and a lot of people hear is like hash rate or hash power. Yes. And that hash power is essentially the guessing of those zeros. It's the computing power to do that. So is that correct?
00:43:35
Speaker
Correct. Yes. I'm playing a part of a stupid person here. This isn't me really. I'm a good actor, aren't I? Let's see. Again, in my simplistic mind, how I explain this is especially like the difficulty adjustment. You alluded to that briefly a moment ago. How I explain this to people is if
00:44:04
Speaker
if it was just you here, and I wanted you to be able to guess a number in the next 10 minutes, I could say, hey, Michael, I'm thinking a number of a number between one and 10,000, and you could just start going one, two, three, four, and you could count to 10,000 in the next 10 minutes. So roughly, I would say, all right, if it's just one person, it'll take 10 minutes to guess between one and 10,000. But if Ruth came in here as well,
00:44:30
Speaker
I would need to increase that number because suddenly y'all are both just shouting out numbers and I need to double or maybe triple the amount of the
00:44:40
Speaker
between instead of one and 10,000, I'm thinking of numbers between one and 20,000. And then if all of a sudden we have a room of 100 people who are just shouting out numbers as fast as they can, I suddenly need to make that a really big thing and harder to guess. And that's essentially what's happening with this hash power. It's the hash power that's being exerted, the amount of voices and how fast these voices are screaming out numbers, trying to guess. And if I did this for a while, I could probably have a pretty good pulse, just like if
00:45:08
Speaker
I don't know if you have a weird hobby of. Guessing how many gumballs are in a gumball machine, eventually you get to the point where you can just see a gumball machine and say like that one has 728 and you're probably gonna be pretty close because you do that a lot and that's what this.
00:45:24
Speaker
the Bitcoin mining network, what Satoshi created, it's able to get a pretty solid idea. It's not going to be 10 minutes on the dot, but man, it can, based off how many people are trying to guess, there's so many people in the room right now are going to be yelling out numbers. We need to make it this much more, more or less difficult. Do you want to, do you want to look, I think this is one of the coolest things about Bitcoin itself is the difficulty adjustment. Do you want to tell us a little bit more about that? I have a,
00:45:49
Speaker
I'll tell you my simple brain way of explaining it after you give us the better, more articulate way of explaining it, the actual technical way. No, that's exactly correct. So what the Bitcoin code does, so again, there's no central entity that says the difficulty, the next difficulty is that many zeros in front of these for the checksum. It's the code that runs on every Bitcoin node and every miner also has a node running.
00:46:19
Speaker
that looks at every roughly two weeks, Bitcoin, the code looks at how fast that these blocks come in. So if it's exactly 10 minutes, it will say, hey, the currently difficulty is good. We keep this for another two weeks. If the blocks over the last two weeks came in a little bit too fast, let's say nine minutes and 50 seconds, it can calculate how much harder it needs to make
00:46:49
Speaker
difficulty, that's again the amount of zeros of front, in order to make it exactly 10 seconds longer. And that calculation, I mean I can't explain you how exactly it works, but that is the freaking part that it can based on the history can predict the future to say roughly this is happening every 10 minutes. And what is interesting, now this of course this works really well if you have like
00:47:17
Speaker
block times of 9 minutes, 50 seconds, or 10 minutes, 10 seconds. It's very, very close. But we actually had cases where suddenly, sometimes, a big amount of the Bitcoin hash power, so that's basically how many computers altogether are working on guessing these hashes, when they all drop off very fast. There was the China ban a couple of years ago, and very fast.
00:47:42
Speaker
30% of the total hash power fell off Cliff, like it was offline. And we actually had blocks that took 20 to 30 minutes average rate. But the first difficulty adjustment realized this, made the difficulty also again, 30 to 40% easier. And from that point on, we had again 10 minute blocks.
00:48:03
Speaker
Which is fascinating to see that it not only works in these small increments, but also these big jumps. Bitcoin, basically for two weeks, it was struggling a bit. But after that, it was all fine again. And that's the crazy thing. If you go to anybody in the world and you say you have a computer system.
00:48:20
Speaker
and you lose 30% of the network from one day to the other, no system will continuously work again. Everybody will say, oh, we need to bring back the 30%. But Bitcoin is able to handle a 30% drop off the hash rate, and it takes a couple of days. And after a couple of days, Bitcoin just jugs along and creates every 10-minute blocks again.
00:48:45
Speaker
Yeah, I think that even today talking about it is fascinating. Give me goosebumps that we have a technology that can do this.
00:48:53
Speaker
Yeah, I think that's one of the most incredible parts of it. Even just the concept of having that difficulty adjustment built in, which the moment you start pulling the thread of Bitcoin at all, that's one of the first things you encounter of like, oh, it won't work because of this. I had someone actually on Twitter today, I mentioned something about Bitcoin and someone commented about mining profitability or lack thereof, and how are we gonna overcome this? But there's too many miners and Bitcoin drops in value
00:49:22
Speaker
No one will mind anymore. And that's where this difficulty adjustment is just incredible. That's again, going back, you know, if it was just you in a room and suddenly, you know, like, wow, that guy is earning some easy money by guessing numbers. I want to go to that, too. And suddenly the rooms flooded with people. Well,
00:49:39
Speaker
If we're still only guessing like a smaller number, that number is going to be guessed too quickly. And we just threw off the entire system. So we have to increase. And then if everyone leaves like, ah, this isn't very fun. I could be I would be better off going back to my nine to five job instead of guessing numbers. I'm out of here. Well, suddenly you're staying in room by yourself. And if that number remains super high, suddenly it's inefficient. That's able to adjust again every roughly two weeks. So again, my in my simple brain illustration would be if the gold in California in
00:50:11
Speaker
1848 was able to see, wow, there's a lot of people heading here from the East.
00:50:18
Speaker
up to that point, gold was being pulled out of the mountains at a certain cadence. So there's a certain inflation rate of new gold being introduced to the market. If the gold was able to somehow forecast and see like, oh my goodness, there's a bunch of wagons coming, it would be able to retreat deeper into the mountains itself. So when those people arrive, they get out there, suddenly when I think of gold miners, I think of a
00:50:40
Speaker
scraggly guy wearing a red long johns so they all show up no offense to any gold miners out there from the 1840s but that's my picture so these guys pull up in their wagons they got their their pickaxes out
00:50:56
Speaker
and their pans and their sifting gold, that gold is suddenly hard to get to despite there being this flood of people. So the amount of gold being pulled out is at the exact same rate as it was before this big arrival, which again, the reason that one reason that's really important is to monitor the flood of new gold hitting the market.
00:51:17
Speaker
And that's going to encourage and or discourage how many people are actually working on this versus other things that can and should be worked on. So if you got out there and it's like, man, digging for gold stinks, that's hard work and it's not worth it. I'm going to go even maybe playing this illustration not too far.
00:51:35
Speaker
But a lot of the companies that are still around today from the gold rush era were not companies actually based around gold mining itself, but in peripheral exposures, for instance, like Levi Strauss, they created genes out there to help people like have a good rugged gene while digging for gold. Same thing with a
00:51:54
Speaker
It was at Ghirardelli. I think it's Ghirardelli. It's a chocolate company. They were a grocery store first, and then they became a chocolatier in California. A lot of companies that are around today, they got there. It was like, dang, this thing, this work stinks. I can go sell chocolate instead. And that's where Bitcoin, it comes in. It's like, dude, that guy's making a fortune doing this. I'm going to get into it. And suddenly it's really tough because everyone wants in.
00:52:20
Speaker
And all of a sudden, it's not profitable anymore because so many people are trying it that, all right, I'm going to go and spend my time doing something else that benefits society and is not as hard for me and I can get rewarded. And that's, again, going back to this terrible monologue. Sorry to drag you all through this. But again, the comment that was made to me prior today and that I get regularly and something I wrestled with at first before I fully understood mining and hash rate and difficulty adjustment is
00:52:47
Speaker
This whole thing about miners and what happens when suddenly the reward is small, but yet it costs a fortune. And the thing is, if the reward of Bitcoin, it's cut in half roughly every four years. If we look at this 10 minute block and all that fun stuff, we know that every roughly four years, the reward for mining of Bitcoin is cut in half.
00:53:08
Speaker
And that's gonna happen next April, April of 24. And if that happens, suddenly the benefit of mining a block is cut in half.
00:53:21
Speaker
So these people are out there mining Bitcoin and not like Michael who's doing it and they're just that's a peripheral benefit besides mining or heating his house and water. But as a pure business expense, what happens to those companies? You know, that's a danger. Well, then because of this difficulty adjustment, it will just simply make it where?
00:53:40
Speaker
people less people are incentivized to mine. If you don't have the energy efficiencies to mine Bitcoin, well, you'll you'll stop. It makes sense to use that energy on something else instead to go make chocolate or make blue jeans. And the people who are able to do it well will continue doing so. And this difficult adjustment will be able to account for all of these things. So it just continues to happen at a 10 minute rate, roughly. And the people who stay in are are
00:54:07
Speaker
benefit properly and those who don't. Well, it's fair economics in a very pure sense. If you want to waste money on it, if everyone decides we're going to stay out here and keep wasting money just because, I mean, technically we could do that, but that's where logic just falls apart. It'd be cheaper. That's where it's interesting to think about. It would be cheaper to not try to mine Bitcoin, but instead just to buy it.
00:54:28
Speaker
Yeah, it's pretty incredible. The motivating factors that comes along with this, again, it's not just money. It's not just computing. It's energy. It's all of these things.
00:54:40
Speaker
Yeah, let me ask you this, Michael. So I guess while we're on things that concern people, other concerns that come up regularly is like AI or supercomputers or hacks. Can you talk to us about those things? Like you mentioned you almost went here earlier, and I'm glad you didn't quite because I want to get, I feel like we've done, have we hit everything from a base level? Like what is Bitcoin? Is there anything else you feel like would be good to share? The only thing we need to talk about is the block reward. And that part, I think we don't have done it, but then we covered
00:55:10
Speaker
Bitcoin as a whole. What is Bitcoin? We did it. So one of the things that, as I explained, like there's 100,000 of computers all over the world that tried to guess this number, this hash to find a block to then why we need to give these computers an intentivation to do so. And Satoshi figured out two ways to do this. One of them is to actually distribute the Bitcoin at the very beginning. So the very beginning of the day one, there were zero Bitcoin in the whole world.
00:55:39
Speaker
And what happened is that every block that a miner found, they got 50 Bitcoin from zero. So that was how Bitcoin was created. And then every four years, like you say, this 50 actually reduced. So it was 25, then a half of this, half of this, half of this. That's why we call it a halfing.
00:55:58
Speaker
But the miners obviously have an intentivation to actually mine now because they get 50 Bitcoin. Now, at the beginning, Bitcoin wasn't a lot worth, but that's why it is having. So the idea or the game theory behind this is having is that as Bitcoin grows in value, the miners get less and less in terms of Bitcoin value, but because the Bitcoin is worth more and more, it actually starts to even out.
00:56:24
Speaker
At one point, though, all the Bitcoin is going to be distributed. So in the year 2140, we roughly have 21 million. And that's maybe one thing we have to talk about, about the scarcity again. But basically, at that point, there will be no more Bitcoin distributed. All the Bitcoin will be mined.
00:56:40
Speaker
I'm glad you're bringing this up. I remember when I first realized that, like this is something I wrestled on for about two hours. And then I was smart enough to think there's no way I'm the first person who's thought of this as a concern. And there's tons of resources. So yeah, the whole thing of like, okay, there's only so many Bitcoin, what happens when they're all mined? Why would anyone else? Why would anyone continue to mine and
00:57:03
Speaker
Verify this network. So why would someone keep doing that after all the bitcoins been distributed that is quote-unquote the only Incentivisor to to mine. So can I apologize for cutting you off? But you brought us up like I said, so in Bitcoin Every block has a specific size So that means a block can have a specific amount of transactions in it now at the very beginning when I started with Bitcoin
00:57:28
Speaker
every block was almost empty because not a lot of people transacted in it. But today, now since a couple of months, we actually have more transactions than block space. So more transactions every 10 minutes are
00:57:42
Speaker
generated by the people that use Bitcoin, then have space in these blocks. Now, the miner somehow has to choose who to put into the block, because let's say there is 50,000 transactions and you only have 5,000 slots, who do you put in? And that's where the transaction fee comes. So me as a person, if I actually send you a Bitcoin,
00:58:03
Speaker
I don't send you a whole Bitcoin. Maybe I send you or in the transaction, I put in one Bitcoin and let's say 10,000 sets.
00:58:15
Speaker
Which is a little bit so that's like zero point zero zero zero zero one Bitcoin. Yeah, just since this is an intro What is Bitcoin a SAT or Satoshi named after Satoshi Nakamoto is a is one one hundred millionth of a Bitcoin So you don't have to buy a full Bitcoin you can buy again It's can be divisible up to one one hundred millionth There's no reason to say the code couldn't be changed to make it where we have even smaller fractions if Bitcoin gets to a place that we need Even further divisibility, but that's it. That's a sad or Satoshi. Sorry keep going
00:58:45
Speaker
No, no, that's okay. So yeah, so let's maybe keep, let's keep at the Bitcoin. So I want to send you a Bitcoin. And what I do is I actually sent you one Bitcoin, but 0.1 Bitcoin, I say, Hey, this is for the miners. And the miners basically look at all these 50,000 transactions that are currently exist. They look at which have the highest transaction fee, because they obviously are interested to make the most money. It wouldn't make any sense to add a transaction in there that has zero transactions or very small one.
00:59:13
Speaker
So they're incentivized to mine the ones that have higher transaction fees earlier. So they will put them into the next block faster. And so that's the way for me to signal to the network how important is this transaction. If I just want to send you a Bitcoin and saying, hey, here's a Bitcoin I don't really care when it arrives, I can put a very low fee. If we're literally standing next to a house and I want to go into the house because I just bought a house from you and I need to pay you, I will probably put a high transaction fee in it.
00:59:42
Speaker
And the game theory says that after 2140 and already today, the miners will make more and more money or value through these transaction fees. And basically after 2140, we only will have the transaction fees. And obviously the idea is that at that point, Bitcoin is so valuable, some people say it will take over all of the currencies and all of the value in the world that we stored, that even if we only have a little bit of transaction fees,
01:00:12
Speaker
it will still pay for all the energy and the cost of all these miners together. And so there's no risk or really worry about this because it's all part of this big plan that Bitcoin will take over the value of the world. That's a fantastic segue away from the question I was going to ask, but into another one. So if by the say it happens 2140, suddenly the transaction fees are so high, those transaction fees are coming from
01:00:41
Speaker
from you and me, like if we're if we have to use Bitcoin to transact and suddenly these transactions or fees are so high, to make sure that we're actually able to pay for things, why would I keep using Bitcoin if it costs that much to use a currency? Is there any solution to that? You mentioned this earlier with layer two. So yes, just about that. Yeah, so actually, let's let's start with outside of, of like,
01:01:07
Speaker
Bitcoin itself, any systems that we're using today is always built on top of layers. So let's say if you want to fly from the East Coast to the West Coast, you have a plane that flies directly between these two destinations, but they don't go that often. What they do is they take together a lot of people, put them in a tube and fly them. But then you maybe don't live right next to the airport.
Layer 2 Solutions and Future of Transactions
01:01:37
Speaker
You have like a bus system or a car and things like that. So what we're doing is we're starting to do things in layers where you have very big transportation systems that only go from
01:01:50
Speaker
like every couple of hours, like the plane, while you have smaller systems like a bus that go much more often that can do the fine distribution. And this system, that is something that humans figured out, we also know, for example, in computers. As we're talking with each other, we're talking through the TCP IP system. And this actually has four different layers where every
01:02:15
Speaker
Every single audio file that I send you, that you hear, go through all these layers. And each layer is responsible for each specific part. And also they start to chunk these different things. So layering stuff, anything, is a normal thesis thing in nature and with humans and whatever. And so Bitcoin does exactly the same. So Bitcoin has the layer one, which is what we talked about so far, is the system that can do a transaction every 10 minutes.
01:02:44
Speaker
but it's completely trustless, meaning you don't have to trust anybody at all. Now, Layer 2 comes in, which is called, today, the most known Layer 2 system is called Lightning. And basically, people explain it always like in a bar tab. So if you go to a bar every couple of days, sending them money every single time, or maybe using your credit card every single time that you walk up to the bar and you buy a beverage and you walk away,
01:03:14
Speaker
Swiping the card doesn't really make a lot of sense. So what you do instead is you give your card to the bartender and saying, I want to open a tab. And then you consume all the beverages you want in the end and at the end of the day or of the night, or maybe over multiple days, if you are a really good friend of the bartender and you trust them that they're not going to run okay with your credit card. Fun fact, it actually happens where I live. Like we, you just have like a running tab over multiple months at the restaurants because you know them so well.
01:03:43
Speaker
Wow, that's cool. At one point, you tally up. But that only works because there's trust. There's trust between the bartender that you not suddenly move away and you never close your tab. And there's trust with the bartender from you that the bartender doesn't run away with your credit card and just spends it. And that's where Layer 2 comes in. So I can basically open up a tab with, let's say, my restaurant and saying, hey, restaurant,
01:04:10
Speaker
I want to open up a lightning channel between me and the restaurant. And through that one, I can then transact all the time without ever touching the layer one. So we basically trust each other. We send each other Bitcoins back and forth.
01:04:27
Speaker
And only when we say, OK, now we don't trust each other anymore, or I want to use the Bitcoin that I have locked into that channel because I have to put in some Bitcoin into that channel. And if I want to use it something else, I can close it, meaning I can undo these things. And the opening and the closing of these channels, this happens on layer one. So for that, we need to do one transaction.
01:04:51
Speaker
And that takes a bit of time that we have to wait for and the console transaction fees. But every other transaction between me and the bar or the bartender is completely free because it's trusted between. Now, what is really nice
01:05:05
Speaker
about Lightning is this can go over multiple hubs. So let's say you, Jim, also go to the same bar that I always go. Now, I need to send you some money. I don't know. I load your lawn and I say, hey, you gave me $10 for this. Now, instead of opening a Lightning channel with me directly, which again will take 10 minutes and you have to wait, and then the Bitcoin is locked into that channels, you can go to the bar and say, hey, bar, by the way, can you send Michael 10
01:05:40
Speaker
the bar now suddenly becomes an intermediate between us two. And that's how the internet works. That's how routing works. That's how everything that we do in terms of communication works, that you don't always actually talk with each other directly. You talk through intermediaries. And the Lightning Network uses that system to ensure that I actually only need to open a couple of channels with maybe the things that I interact with all the time. But because they are then connected again in the background,
01:06:01
Speaker
$10 or 10 Bitcoin or whatever it is.
01:06:10
Speaker
I can send now money in lightning speeds. That's where the ideal lightning comes from. It's in real time. Between people without needing to wait for these 10-minute block times every single time that they're going to be slow and, as you correctly say, got to be very expensive because I believe at one point these
01:06:30
Speaker
layer one transactions, they're only going to happen if you do really, really big transactions. Like if you buy a house or a company buys one another, that's where you go to layer one. Because again, there's trust lists down there. And for the daily stuff of just using systems, we're going to go layer two or maybe even layer three. However, these look like we don't know yet. There's some ideas.
01:06:53
Speaker
of layer three on top of layer two, but that's where we like daily transactions are going to happen. They're going to be instant. They're going to be almost completely free. So like these lighting transactions, sometimes you pay like even less than a set. So that's like less than a hundred millionth of a Bitcoin. So in dollars today, that's a couple of cents of costs to send.
01:07:17
Speaker
and these transactions around and they're instant or like almost instant fast. So that's where we see the layer two really happening. And to go back to the history, that's the part that I did not realize in 2011. When I looked at Bitcoin 2011, I said like, this is way too slow, but I did not realize that people will come up with layer twos and layer threes. And so, yeah, I missed it at that point, but I learned it later on.
01:07:44
Speaker
Yeah, that's a that's a big thing of other cryptocurrencies is the inefficiency from a that we spoke to earlier, the inefficiency of time and power and everything that comes with Bitcoin. And again, that that comes with the trade off of security. But then the the ability to build on top of that to create quicker, less, more cost efficient, all these things, I do want to
01:08:11
Speaker
If you could just real briefly, I want to remove any sense of fear or, or queasiness of this lightning thing. Because when we, when you speak to this and not you, but when it's spoken of, of like, Oh, you set up these channels and blah, blah, blah. Like that can seem scary. Like I don't know what in the world, like I, so I have to go to, if I want to send money to you, what we set up a channel, how do I do that?
01:08:36
Speaker
I don't even I really know how to get in my email. Like, how do I set up a lightning channel? Like, what does that mean? Like, if I go like, I have wallet of Satoshi on my phone, it's a it's a Bitcoin wallet, and I can send you over the lightning network, I can send you Bitcoin instantaneously, it takes place. And I didn't have to set up a channel with you. So did the channel get set up for me automatically? Is that is that routing through someone else's channel? Like, how does that work? Yeah, that's really the part that I see a lot of this
01:09:05
Speaker
Is being abstracted or will be abstracted completely? Like if you remember, like in the past when we had to go into the internet, like you had to take your phone and disconnect the cable and connect it to the computer and you had to click a button and it took a couple of seconds and it made all these beautiful sounds that we all miss today. Um, and then you were in the internet and they couldn't use your phone and like, and now literally my watch is in the internet all the time.
01:09:29
Speaker
Like that's from like where we went from and that's where we're going. And I think we're still in analog times in like Bitcoin or Lightning. And so yes, today, if you want to use Lightning, you have to do channel management there. If you want to really do it by yourself. So meaning if you want to have your own Lightning node, you have to find peers. You have to open channels to them. You have to make sure that like the channels are balanced and all that stuff.
01:09:55
Speaker
There are today now solutions where companies take this over completely for you. The problem is they actually then have access to your Bitcoin, so you basically store it with them. Now, they don't have an incentivization to run away with the Bitcoin, but it could happen. And we've seen these exchanges and all these other, oh, just trust me, I will keep your Bitcoin safe type of companies, people.
Complexities and Adoption of Bitcoin
01:10:19
Speaker
Eventually, they're all going to, again, like we said before about the driver's license, they have an incentivization to actually start.
01:10:25
Speaker
do some shady stuff. But what I believe is in the future, we're going to have Lightning software that will do the channel management completely autonomously, where you just have your node or your Lightning node. It can be on your phone. It can be at home, wherever it is. And all these channel management is going to be completely automated, where you just send money between different entities, and you don't worry about this anymore. Like in the past, where we worried about
01:10:55
Speaker
Am I now using the phone or the internet and today the internet is everywhere all the time active and we don't even realize it anymore. Yeah, that's exactly there. That's so much the demystifying this is a few things of recognition. One is the recognition of how much we utilize today that we don't really understand that we take for granted and it just works.
01:11:18
Speaker
And I know Bitcoin at being a new thing, and there's fancy words that aren't used in normal vocabulary, so it can seem mysterious. But the moment we come to realize, well, that's how most things work, and it will become all the more normalized, it demystifies. And again, it makes it much more available and relatable from a normal sense. Yeah.
01:11:46
Speaker
whatever 30 years ago, the internet 40 years ago, it's like I do that. I don't even know what you're talking about. Like how would this work? How do I, like, how do you get online? What is an email? Like I love this video from like, was it like the morning show or something where they're trying to figure out like what is the internet and what's a,
01:12:01
Speaker
They're talking about that the at sign, like, oh, that little thing with a circle around it. I think it says about is like, that doesn't make any sense. Like, what is it? What's it? What's the Internet anyways? It's like, that's where we are with Bitcoin. Like, what is what is a Bitcoin anyways? And there can there can it can seem daunting. And again, daunting can also equate to unnecessary. But so much of that daunting and unnecessary is built around unfamiliarity.
01:12:28
Speaker
And if we can just start removing that sense of unfamiliarity and even that sense of having to understand everything to just not, I'm not saying blindly trust and just fully accept, you don't have to know anything, but like, you know, there's, there's, there are levels of like, I don't know how most things work and I'm okay with that. Like, I don't know how the toilet works. I can't, if my toilet breaks, I can't fix it. It's okay. I'm still going to use it. And, uh, that's okay. There's certain things I want to know more or less about, depending on like how dependent of it's it working and trust it takes.
01:12:57
Speaker
And I think that's where different people are going to come to terms of like, I need to know all this or like, I don't need to know that much as long as I know it works and other people know it. So, um, here, my, I guess along with that, that, that lack of trust in the fears, could we just spend a moment talking through these, these last, these, these things that tend to trip people up.
Security Concerns and Future Challenges
01:13:18
Speaker
Um, some of them may be valid. Some of them may be completely irrelevant from,
01:13:25
Speaker
What, but what if X happens? What about supercomputers? Or what if, what if, I don't know, what if Bitcoin gets hacked? Like what if, what if someone, I've heard, I have a friend who lost his wallet and he would be rich and blah, blah, blah. Can you talk about like these what ifs? Yeah, there's definitely the question of like, yeah, what are, what are possible issues that could happen to Bitcoin that
01:13:51
Speaker
It's going to zero. That's basically what we say. If we say it's going to zero, that something breaks within Bitcoin, that the system that I just described somehow fails in some way. And one of them, yes, is that people talk about supercomputers or quantum computers, basically. So in this calculation that we talked about, to figure out the hash where we have to guess all these numbers or where you said like shouting into the room,
01:14:20
Speaker
A quantum computer can do this much faster. Or we believe quantum computers will be able to do this much faster based on what we currently see of a quantum computer doing. And if we say much faster, we don't mean two times as fast or three times. We mean like a million times faster. So the worry is that if somebody figures out a quantum computer, they will have more hash rate than everybody else
01:14:49
Speaker
And one of the problems is if you own all the hash rate, so meaning you can create every entry in a Google spreadsheet, you can basically do games that you can like trans or you can publish a transaction. And later on you can say, Oh no, actually I never published that one, but you already bought a house with that transaction and stuff like that. So if I'm the sole person that has all the hash rate, or if a company or some kind of entity has this,
01:15:19
Speaker
that entity can then start to play games with the network. That's the worry about quantum computers. There is two things we have to understand. First of all, quantum computers are very far away. Today, quantum computers are literally struggling with calculating 1 plus 1. And that's literally, like, that's a problem that's where we are. So if we take this moment to just state at this point in time, I am smarter than a quantum computer. You are, yeah. Take that.
01:15:48
Speaker
And the other thing is there's only very few in the world to do this. So there is a risk, but we believe that it will take quite a long time. And that means the network has enough time to adapt. And adapting means that we could change the hashing mechanism. So the hashing mechanism that we currently use is called sha256. You don't have to know what it means, but it's just that that's the way that we're using.
01:16:18
Speaker
And Bitcoin, the network, could agree on using charged SHA-256 quantum safe or something, or we create another one. And we could all agree as a Bitcoin network that we all upgrade our nodes to use this new standard. So that's one of the things. The other thing is, why? Of course, the faster that Bitcoin grows and the more that Bitcoin is actually adopted by all these big companies, and some of them already using it today,
01:16:47
Speaker
Why would they interest in actually breaking Bitcoin? Because they literally would, if you go back to your gold, they would literally throw their gold from their ships that they just mined so hard. It would not make any sense if Bitcoin is really used globally by all these different companies and people
01:17:07
Speaker
Why would you attack Bitcoin? Like it doesn't make any sense because Bitcoin then will be all worthless. Everybody's going to go back to, I don't know what, trading maybe assault or who, whatever we're going to use at that point. And so that's the other thing is like, yes, there is a technical risk, but we always have to understand that the game theory says that a company with such amount of power, they better just mine and behave in the system than trying to destroy Bitcoin.
01:17:37
Speaker
Outside of quantum computing, is there anything else you feel that or anything else that you hear as being like the big what if or that you think would be a what if or that's scary with Bitcoin? I think there is one thing that is still scary to me and that's that there is a bug in the software that we haven't found yet.
01:18:06
Speaker
But I also have to say, of all the software in the world that runs, probably Bitcoin is one of the software that has seen the most scrutiny of most people, of most programmers, of the most intelligent people in the world. They have looked at this code probably more than the code that flies your airplane, that drives your car, that literally does a surgery robot.
01:18:35
Speaker
Bitcoin is now so widely used by so many companies that so many people had an intentivation to find a bug in there and that if it exists, it would have been found. But what we have to understand is also we constantly modify Bitcoin. We add new features to it. And there are things that are not complete bugs that we say, oh, now Bitcoin is broken.
01:19:02
Speaker
But there are cases, and there have been some in the recent months, where people start to use Bitcoin in a way that nobody else intentions. We don't have to go into them, but that's where the whole ordinals and inscriptions come from. That's a technology that we added a feature to Bitcoin and somebody figured out another way to use it where nobody else thought. And so we have to be very careful that as Bitcoin is growing, that we're not
01:19:28
Speaker
blindly adding code or new functionality into this. But that also have to be safe. Like of all the open source stuff that I've ever worked with, Bitcoin is probably the hardest, the slowest, the most scrutinized way. If you want to even change one line of code in Bitcoin, there's so many people looking at this. There's so many tests ran like no other software that I've ever seen in my life. So I really think.
01:19:56
Speaker
The chance that this happens is very, very small, but there is a tiny bit of chance. But I believe that chance is actually less than us finding a bug in an airplane or things like that. So putting it relatively to other things that could happen to our lives, I think it's actually less. And so therefore, I sleep pretty well about all of this, but there is a tiny chance.
01:20:21
Speaker
The last thing I want to talk through is that as Bitcoin grows, the safety of it in a lot of senses increases as well. So when Bitcoin was young and not widely distributed from a hash rate or a node system, it would have been easier to manipulate the system. But as the hash power increases and the people running nodes increase and people verifying these transactions,
01:20:47
Speaker
it as a system and the more eyes scrutinizing it, it itself is becoming strengthened. That's similar to the
01:20:56
Speaker
What I believe is Preston and I talked about a few weeks back was the value of Bitcoin is as the value of Bitcoin increases, unlike most assets, you know, you get a higher P ratio, it becomes more and more risky because it's it's seemingly overvalued. What? Meanwhile, Bitcoin as it becomes more increases in purchasing power, there's a place of it becoming a sense of safer asset because the adoption and the
01:21:25
Speaker
the market cap of taking over other things, just the probability of overtaking other things and become even further adopted just increases. So that's where time and the adoption rate is doing the antithesis of so many things out there. It's like, oh, if we have more people scrutinizing this or adopting it or buying it, it's poking holes in all the time. Meanwhile, this thing is just being more and more built up and secured and valuable
01:21:55
Speaker
I was writing an article just a bit ago before this.
01:22:00
Speaker
The question was about price of Bitcoin if it's safe now, because it just went up by like 25% in the last few days. And it's, again, my one of the responses, who knows what's gonna happen short term as price. But theoretically, as I just mentioned, as we see an increase in these things, like it should become a safer asset, a safer code, a safer thing in general, because of this, these people around it. Yeah, it's pretty amazing. And analogy I've heard about that is like,
01:22:30
Speaker
If you want to, let's say you have a hotel and you go to the hotel and you burn down the hotel, that's obviously bad for all the people. But if everybody has a room in that hotel, suddenly everybody starts to protect the hotel. If you literally also burn down your own room and the shelter that you have,
01:22:50
Speaker
And in that single hotel, like nobody has an incentivization anymore. People are incentivized to work together, to help each other, to keep the hotel alive. And now, of course, this is a bit weird in Bitcoin, but that's exactly what's happening. And if everybody starts to use Bitcoin, nobody has an incentivization anymore to hurt it. And everybody suddenly is very incentivized to make it better, to improve it. And that's basically the thinking of open source. That's the whole reason that open source exists in coding.
01:23:20
Speaker
And I think that's what's so hard for so many people to understand is that today we don't have a single money that everybody rallies behind. We have all these different currencies and they all have incentivations to hurt each other and things like that. But if we have a global standard where everybody agrees upon, suddenly the whole world will be a better place because we're all going to be incentivized
01:23:46
Speaker
working together because if one person tries to hurt everybody, they hurt themselves. And that's what Bitcoin will do. Yeah, that's weird. I mean, theoretically, if you have some maniacal person who wants to burn down even their own room, they don't care. That would be scary. But that's where with Bitcoin, it's not just a room that requires a match. Now it takes a lot of resources. So suddenly you have to have a maniacal person.
01:24:09
Speaker
who has access to an insane amount of resources and is able to manipulate those in a very particular manner, where it just becomes the statistical probability of this taking place as miniscule and not worthwhile.
Continuous Learning in Bitcoin's Evolution
01:24:21
Speaker
So yeah, it's a self-enforcing mechanism. Michael, I finally understand Bitcoin. By the way, this is maybe 5% of all of it. It's big. The rabbit hole is big. But like you say,
01:24:38
Speaker
You don't have to understand everything. I don't understand everything. I have never read the Bitcoin code from top to bottom, but I'm still able to explain it. And I think that's really the part, like you're saying, is that I feel like it's really great that you can go really deep in Bitcoin and understanding the basics. And I would say what we talked about now are the basics. I think that's really good.
01:25:01
Speaker
But there is so much more to explore and it's an endless amount of rabbit hole. I started again two years ago, roughly. And I feel like, yeah, like I said, I've maybe found 10 or 15%. And there's also so much more to come. Like so many people are working on improving Bitcoin every single day. And that's the exciting part that we can now be part of this, because if you want, you can be, you can go out and change this thing still today. I think in a couple of years, it will be impossible to actually move it around, but that's a good thing again.
01:25:30
Speaker
We want slow systems, but that's the super exciting part that we can now build the future of money for the world. And yeah, I encourage everybody to learn, specifically podcasts are a great resource to learn. There's so many things out there, but there is websites, there's books, there's endless amount of information to learn about all of this. Awesome. Well, thanks, Michael. There's a handoff. Is there anywhere that anyone wants to
01:25:57
Speaker
reach out to you or learn more about you or anything you think that would be important for them to learn, what would you have them check out? You mostly find me on Twitter under the name Schnitzel. Yes, that's the Austrian speciality. I'm not from Austria, but I still like Schnitzel. Maybe for the next podcast, we can look into the history of that name, but yes, I'm on Twitter and there's also a link to Nastur over there.
01:26:24
Speaker
And pretty much on every other social media thingy, you will find me under the name of Schnitzel. I'm trying to, whenever a new one pops out and go there and try to claim it. But yeah, reach out. My DMs are open on Twitter. Reach out if you have any questions. I talk right now a lot about the home mining, but I'm, I really like to explain people things. So yeah, I'm happy to have meetings with people to explain them the stuff because
01:26:53
Speaker
I don't know a lot about other things and I love to learn new things. So if I can tell somebody else about Bitcoin and they can get a deeper and a better understanding of it, this is what brings me joy. And so yeah, reach out if you have any questions, I'm happy to help. Perfect. And definitely I have to have you back on once you've managed to scale the heating system. And certainly once you figure out how to, you've cracked the nut on the cooling system, we'll bring you on, we'll run a trial at my house. All right, that's good. Let's do that.
01:27:22
Speaker
Thanks, Michael. Thank you. Hey, thanks for listening to the Intentional Living Podcast. Now, today's show is simply entertainment and educational in nature. Do not take this as tax, legal, or investment advice. If you are looking for tax, legal, or investment advice, you should go talk with a tax, legal, and or investment advisor. Again, this content is simply educational and entertainment purposes.
01:27:52
Speaker
Thanks again for listening. We look forward to you joining us on the next episode.