EB90 – Dave Hudson: Insights From The Data Mine And Other Adventures Around The Block

Transcript

this episode of epicenter bitcoin is brought to you by vulturo the goal to Bitcoin exchange trade gold to Bitcoin instantly and securely starting at just one milligram go to bolt or com to deposit some Bitcoin and start trading today and by shape shift with no account or sign up required it's the easiest way to buy and sell gems dash new bits Mineiro and other leading cryptocurrencies go to shape-shift iota instantly convert your old coins and to discover the future of crypto currency exchanges hi welcome to epicenter Bitcoin the show which talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is Sebastian Quetta and my name is Ben

Kevin crane we're here today with Dave Hudson he's someone we wanted to have on for a long time some of you may know him from the block hashing it which is the leading or one of the leading blocks about Bitcoin mining it's written a lot of really interesting stuff there and he is he's also the VP of software at pier nova which used to be a mining company they've sort of pivoted to doing other things in the blockchain Bitcoin space at the moment and previously was also working for Qualcomm which is a big chip manufacturer and then they've also been sort of involved in the Bitcoin space recently I think we've did twenty one thing and ritual we can talk about to

later so Dave thanks so much for coming on hi sir pleasures with her so to get started tell us how did you how'd you get into Bitcoin and especially how did you become interested in writing about mining okay so I got interested in Bitcoin by one of the guys I currently work with a pin over he and I had worked at another company called you become for quite a number of years and he had been off and done some other stuff and then he'd actually set up a company which is called high Bitcoin and they were looking at building basics for mining and so he was really interested in that whole hardware design and the

call me one day when I was it over in the in California and said have you actually looked at this stuff what what do you make of the technology are you interested in doing something with this and so I looked at it and I read everything I could find and this is about the beginning of last year but begin 2014 and it was just so fascinating i looked at this thing just thought this is huge this this network's fast some really interesting ideas but i wanted to understand a bit more about it so before i was even going to think about actually going and doing anything in the space i want to understand what the space was about and how it worked and so I started looking for information about how the core network worked so you

could read the source code that's fine and you could sort of see postings from various people that how mining worked but I started trying to find any in-depth analysis of what was really going on in the mining network what really worked in terms of how things were put together and how they've really behaved and I just couldn't find anything so I sort of a bit and listen in so most of what I do I like to have good day sir and I like to be able to see numbers and actually compare things so because I couldn't find them i sat down and started to cry and work things up myself yeah that's true a lot of when you come into the space you quickly realize that a lot of the information

that's circling around is either opinionated or highly anecdotal and riving actual statistical analysis I mean other than just the better that's provided by just the rob block chain is really valuable can you tell us what are some of the metrics that you find the most interesting or some of the core metrics that you're specifically looking at when looking at mining so I think there's lots and lots of really interesting things and one of the things i find fascinating is that every time you look at a different set of data you can find something new in that you haven't seen before and and I've seen you know lots and lots of different patterns and but I mean that the stuff that

started me aren't being interested was looking at things like hash rates I had a background of doing semiconductor development as well and so you know seeing a technology that erased through every generation of you know all the way from software through two three generations of asics via GPUs in the space of five years was quite amazing I've never seen anything like that before so I wanted to really understand what was driving that and understand where those numbers came from and understand you know what they actually really meant so the starting stuff i was looking at hash breaks and trying to understand the relationship between hash rates and the technology changes and the amount of money that was involved in

exchanges some of it was pretty good some of it early on was pretty wrong but i was trying to understand what actually drove those those hash rate numbers and where would that ultimately lead the network so that was where I was one aspect to it the second was to try and understand what it means in terms of who is actually managing and controlling network and also to understand how the networks being used so what are the nature's of the transactions what sort of things are being transacted are the real transactions are they what's actually causing these various things to happen and then to try and understand where that can actually go in the future so the thing I'm really interested to

understand was or was very interested to understand when I started doing it was to see what happens when the network starts to get full what happens when a block rewards change and what happens the mining incentives and what happens to the nature of mining and then see how that evolves over time so really I just want to understand how the network can evolve which ways it could move and the starting point is to understand the basics of what network does right now so so that I agree that those are so the torque to core things related to mining is the hash raiden who's controlling the hashing power now you mentioned basics so I mean I think most listeners will be aware of what hashed rates are but just

for the sake of introducing this topic can you define what is the hash rate and how it's calculated okay so that the hash rate isn't directly measured it's not something you can actually really measure the best you can do for the hash rate this you can sort of indirectly measure it and this is something i looked at last year the the only metric you actually have within the main bitcoin network is to see the number of actual computer blocks so you can measure the number of locks that were actually calculated you can see the difficulty that was being applied you can sort of see what's happening to the difficulty changes and from that you can get a gauge as to what the real hash rate is but of course it's the nature of

Bitcoin blocks is that they found relatively infrequently it's you know nominally once every 10 minutes but that has a huge amount of statistical variability in it something that's that random when you're dealing with a nominal 144 blocks in a day can have a huge amount of variance so on a day to day basis the difference in the number of blocks you can find could be plus or minus twenty percent quite easily so it's only when you look at things over the longer term you start to get a real picture for what's going on and so I wanted to understand you know what's the variability here and what's what can you and can't you safely say about this and then you know look at whether you can actually make some predictions about how things will change over time so

fundamentally with Bitcoin network you have what's actually classed as a non homogeneous or in homogeneous Poisson process so a Poisson process is basically modeling random events where each new events in the case of a Bitcoin each block is statistically uncorrelated with the previous blood so it doesn't matter what the previous one was or how long it took the next one the amount of time it takes to find it is pretty much independent of the previous one and so this leads you to the situation where you can get blocks at a fem in very rapid succession or you can have blocks that take you know well over an hour to find but the statistical mean is going to be 10 minutes is there are there some

phenomenon or patterns outside of the Bitcoin space in our life that people are familiar with that are ruled by a similar or the same statistical process yeah in fact what some processes are very very common the the classic ones that you tend to find people describe are things like radioactive decay that's another another example of a pass on process things like the number of phone calls arriving at a call center that there's lots of these sorts of things that actually look like these Poisson processes and so there's a lot of a lot of mathematical modeling that's been done for various different domains and you lose some of those to

actually understand what's happening with Bitcoin and it actually turns out there are some subtleties to Bitcoin that don't make it quite as clean as some of these others there are a few subtle interactions but I don't think anybody's done a great deal of analysis on those yet I think I recall learning about Poisson process and statistics in school but that was probably one of my worst subject so it's fair to say I've forgotten about that so so we mentioned that you know II and we know that anomaly blocks blocks take ten minutes are on average 22 defined and but that there is quite a bit of variance in that amount of time can you talk about that

yes so that the idea is that you have an exponential decay function so initially you know that the most likely time to find something it's basically new at time zero so it's when you start off and then progressively find fewer and fewer out sort of time intervals as you get a longer time interval you get less and less probability at that time particular time will be at the next event so the actual function is fairly straightforward to plot because it's just a Mexican exponential decay the in terms of what that what that actually means though there's there's a few subtleties for Bitcoin itself so it is that that model works if you assume that

everybody has the same information at start time and so everybody starts from the same point but in fact in Bitcoin there are some subtle that mean that the initial few seconds aren't actually quite as even the distributor's they should be so this is propagation delay time in the network where it takes time for blocks to propagate and so you have a period of time where not everybody is actually working on the same problem so even seeing everybody starts on the from the previous block it takes a while for them to all see that previous block so that the actual curve isn't quite that ideal Poisson process curve and this is an area i think that needs a little bit more analysis i haven't had the time unfortunately but it's on my list of things to do so many will have heard

about a date of propagation how fast blocks propagate in one context in which this has come again and has been discussed this is the block sighs debate so the question whether the block size should be increased we've talked about that quite a few times on the show you come from this very i would say an illogical background or analytical approach to looking at bitcoin we're looking at the data so from that perspective what is you of you about the block size question so i sent the biggest problem with the block sighs debate right now is this there's a lack of really good data driving it and i think there's a few things that need if you could actually sort of plan this as

an engineering exercises a few things you want to do first and i think the first thing you'd really want to understand this what is the real behavior of the network so i have seen some work where people have been trying to measure propagation times because that has that propagation characteristic as a very profound impact in terms of have a network secured and how fast the miners ratio operating that there's a lot of the data seems to be very unreliable and since that no is really taking into account where the majority the hashing is right now and so I think that there's a there's a lot of analysis needs to be done in terms of measuring

real propagation delays so you know if you can get a statistical mean that's fine but you actually need to know worst cases in certain circumstances you need to know how well connected all the various miners are and actually try and model what the network looks like and with the bandwidth that they all have between them what will actually happen to various circumstances and it's not a hugely complicated model because there's only really maybe a dozen large minors at the moment so somebody could actually model that I think that would go a huge way to really understanding what changing various characteristics and it would really do to it yeah i mean i agree right it often seems that in the discussion there is sort of a lot of opinion and another lot of analysis but

given that we don't have that data at the moment what is what is sort of your personal opinion and your personal view you know given the information we currently have what would happen if the block size was increased to 20 megawatt so I think 20 megabytes would be a vast increase in and I think it would be probably very unwise to do I think that there would be problems exposed from doing that and and it's sort of such a huge step increase and it's more than now automatically increase that I think that would be very very problematic and I don't think the analysis has been done to sort of size that the truth isn't pregnant actually I'd to 20 mega byte

block straightaway but what would happen is that if somebody still runs a stress test like the ones that I've been run recently that would start to get it would be get certainly more interesting I think you'd see different effects on the network under those circumstances so I think 20 megabytes is a huge change I think the other thing that's unclear to me at the moment is just how much the real the blocks that we have right now are really actually full something I did some analysis on John try to work out just how full blocks were and historically have full they've actually been based on what minus we're really trying to mine and so we did some statistical analysis and and looked at know how all those blocks are and what does that mean for transaction propagations but the big unknown is

actually just how many of those transactions that have reminding two blocks were actually really useful and interesting and if you started to push up against limit where the fees went up how many of those transactions would just simply go away people shuffling coins around or just moving things between wallets and not really taking taking much regard for how they did it because it was plenty of space available I think there's there's a lot of unknowns there so Kiki so what do you mean by like some of these transactions are not of any well like that there's a lot of it if you actually look at sort of blockchain done in folk they actually have a statistic for some of these now where you have these sort of so-called long chain transactions where you see things basically moving

around in circles almost where you see so the same sorry so the same amount of coins just moving from an address to another yeah and so obviously it's very difficult to do a full analysis of it but there seems to be a reasonably high proportion of the transactions have been made to date aren't actually commercial transactions they're actually simply people moving things around and then moving them back to where they came from in some cases yeah actually what one thing it related to that I was sometimes thinking about you know one of the one of the metrics people always talk about when you say all bitcoin is growing and surfaces it's the transaction volume of course let's say your company like coin basis sir all right so you care quite a

lot about what bitcoin is looked at and if bitcoin is perceived to have traction you know when you try to raise your next round of venture capital like that's a chart you're gonna have up there so how much does it cost to actually you know just just keep on generating pointless transactions to show that kind of gradually increase probably not very much so it's over yeah even the stress testing costs pretty much and that was actually one of the interesting things about the recent stress test is that the cost for doing that was actually pretty low and when you're talking about people have an incentive and a lot of bitcoin is about incentives but when you have people have an incentive to see a higher and transaction volume it's actually very easy to to create a much much

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like what what exactly happened ok so I mean I I said it wasn't involved for those so I've only seen some of the analysis has been subsequently although this was a thought experiment I I came up with the end of last year beginning this year when I was trying to work out what would happened to transaction confirmations if the network starts to congest and so the idea of the stress test is basically rather than say we'll take the normal volume of Bitcoin transactions what we actually do is you run some period of time where you dramatically increase the number of transactions and see what happens to the behavior of the network so the interesting thing about the stress test was that the network actually responded exactly like you'd hope it would expand everything kept working blocks were

absolutely full nothing failed some transactions got delayed especially the ones with lower fees that they would be delayed because it's in the minors incentive to to take the feist fees that are available so from that perspective that the stress tests were actually extraordinarily positive from the network they actually demonstrated the network work really well and a few people found a few things that broke and they've been able to go and fix those so it's actually been a good thing and in fact stress testing is usually a good thing for any engineering system it's just tricky to do in a live system so but the idea is that basically you you create a large number of transactions flood the network and see if that will affect the behavior and in fact one of the things

that actually did come out of the biggest one of the stress tests was that we saw things dramatically increase so you know it got to the stage where in order to see transactions really confirmed quickly and still not not taking many many tens of minutes or hours to actually confirm people were actually putting higher fees associated with transactions so you actually got a for the first time you've got a viable fee network and that he's actually being paid to minors so in this flock sighs evade one of the vocal point of view has been Mike Hernandez been on this show is well to talk about that and he has argued and written some some blog posts

I've got a lot of attention that if the block size is not increased and if we do have this consistently you know Chris RSS was only short duration but if this keeps going on and on and that this would lead to basically a disaster with nodes crashing and particularly bad user experience I think that's where a lot of it comes in right because all of a sudden uses entrance actions they don't get confirmed you know they don't know what fee to choose they might have to like resend it but how and walah zone set up to do that what are you fall tonight do you think these concerns are valid certainly some of them are valid I

think there's no question that bad user experience is is definitely a valid concern and I think this is something that there's been some discussion over the last few weeks about exactly this issue the problem of not knowing in advance what feel you need to use in order to get your transaction confirmed this would certainly be at least a little counterintuitive to most people I mean normally when you when you you go to send something to somebody else you you pretty much know what it's going to cost to send it if you suddenly discover that actually what you thought it was going to cost is actually not that it's actually you know three four times that then it's not the most obvious of models so that that one's sort of a little weird part of the reason I think that that concern exists

though is because the network isn't always busy and so there are times when you can get away with much lower fees then though is used to paying those higher fees so the the volatility is the bigger problem wouldn't anything else I think if you actually had a network where the steady state was that the other fees had to be reasonably large then it would be unlikely that would change too much because the cost of running an even bigger stress test would start to go up I mean that's actually one of the problems is that for somebody who wants to run those sort of stress environments is that as they push the fees for transactions higher and higher they're also pushing the fees higher that they need to use in order to stress the network even what so they're having to pay more to run that test so I

certainly that though there is an S mac where if users aren't sure what the fees need to be that's that's not a good situation and and that really comes down to the Bitcoin wallets you know either wallets actually able to predict what the fees need to be and actually do that effectively I mean just just one one thing one beef point and dad to me it seems kind of obvious and users should never have to think about the fee right cat I think you do the users need to think I go but feed we need to pay that's not a good here how many did you talk about like mainstream adoptions and people will you know people will just struggle with that they won't know what

decision to take exactly if you look at mainstream financial transactions like credit cards it's it's invariably the recipient pays that fee not the sender I mean it sometimes is hidden and and sometimes it's an explicit charge but but generally speaking the recipients responsible for dealing those fees no in I think the stress has to me demonstrated that there was a clear risk that bitcoin could be attacked fairly simply and easily and perhaps a more certainly pretty cheaply what did you take away from this what did you learn or what do you think that we learned as you as the as the space what do you think to learn the what do you think the space to learn from this so I think that the good

things were that you know the network stayed up it stayed reliable that was actually you know in some respects it's surprising because quite often with you know engineering systems they don't don't behave as well as you'd like them to so that was actually a very positive thing I think that the fact that the tractor that could be run for such an inexpensive cost was predictable I think that becomes harder as the fee market goes higher and fees go up but the thing that I'm concerned about is that if you actually look at this and say well you know if we went from say a 1 megabyte block to it a 2 megabyte or mega vibrate megabyte whatever you are just kicking the can down the road a little bit you're not actually really making it dramatically harder you can still cause

stress to the system if everybody's expectations the fees are very very low the cost of the stress test of the 20 mega byte block sizes aren't actually that high but the potential consequences of having 20 mega byte blocks are sort of greater to the network the risks are much higher because you have a much greater race to orphan equiv potentially causing miners to change their incentives and I think this this is one of me the areas that's worrying and one of the reasons I think that you know more modeling is actually required to actually make some of these changes and I don't know of course there's the other question of you know hard folks are

something that our problematic at best and and really do you want to start the whole ball rolling in terms of saying well we're going to accept making hard for changes to network on unquantified reasons sometimes today's magic word is hash hasa CH go to let's talk bitcoin calm to sign in enter the magic word and claim your part of the listener ward so next year 2016 the block having is going to take place how does that come in here so i think the

block reward hobbling is is going to be a very interesting time if you look at the last one so the one that's three years ago very quickly after the block reward hard when the price of bitcoins basically doubled against the US dollar and so the effect was pretty much lost so yes there's anecdotal evidence that some timeline has decided that was no longer cost-effective to mine and they shut down and mining but the price of the coins went up and so the minus we're still getting a significant amount of money and so we saw that hash rate sort of race away and you saw the whole developed of asics i think the next one is more tricky the probability that the coin price will double seems unlikely and so then you get down to a question

of what's actually incentivizing the miners and I think that's unclear at the moment I think beginning of last year was probably easier to predict that most mining was being done by sort of large role relatively large cloud mining infrastructures so you had you know tens of thousands of people who are paying into actually do do mining activity I think it's less clear how much of the network is currently mining that way now I think have some big pools that it's not absolutely certain quite what they're doing or quite have it how they're going to operate so the big question really comes down to costs mining ultimately is about you know how do you convert electricity into ashes

and gain the largest share of the total network and the question you have to ask is well who can actually afford to run if the mining reward sort of drops to half what is right now because the theme the fees right now pretty much insignificant so that if the total rewards in terms of US dollars halves then it's going to be much more difficult for some of those mining operations to continue and we've seen this already a large number of mining operations have shut down because it was no one cost effective to mine and then you're left with people who potentially have different incentives for mining so their reward is not

necessarily in terms of it costs them X amount of dollars to to pay for the mining and they they get 2x plus 1 from doing it you potentially have a situation in which some people can afford to my little loss because they're using it as a means of actually moving currency around other ways but I think that the whole question of what's going to happen the next reward happens is very unclear in my view its northern it doesn't sound like a good scenario it's coming up like because either we sort of keep going as as we are today right so and let's say we increase the block size

so of course that means that there's a lot of space for blocks and because miners are competing the fees the fees will not go up substantially right and that's great for me user experience point of view it's it's great from sort of also that story when it comes to the option you say pick on is fast because cheap well right that those are some of the main selling points that we've been talking about for years to everyone and people that make sense to people and and you can keep saying that then right but the problem is right then we're using but the hash rate drops in half people turn off the mounting hardware and well someone you can vent out Howard way to attack it or it just becomes so you have a security problem right and then I

guess the flip side is you now leave it at one megabyte you hope the transaction volume goes up and that then all of a sudden you start having people paying five million bitcoins fees and some lightning network and somehow and it seems very unlikely to me that somehow this is going to work and all of a sudden we will then have this P market a compensator yeah I I don't see that any hope realistic you a free market that compensates for the loss and mine rewards in 2016 I mean there's just not enough time I mean we're talking 12 months and unless there is an absolutely phenomenal increase in transaction rates and and a big change in the way people

are prepared to fund those transactions but I just don't see reaching sort of the fee level where you even get half of the loss in my reward I mean you're talking about losing 12 and a half bitcoins per block as a reward change and that's that would be a staggering amount of fees and of course if you actually make the block size larger than that that fee market will never never exist I mean it is just there's no incentive to pay any fee if you don't need to so one of the things he wrote on your blog is one thing that is clear is there will have to be changed using the way which mining is funded what sort of changes you have in mind well I don't really know I think that I mean if you look at if you look at mining right now

there is a there's a tendency to centralize towards wherever the look the energy costs the lowest those energy costs could be either you know you put them somewhere we've got cheap geothermal power but it could be somewhere where you can get cheap subsidized power and I guess that's happening in some of the Chinese operations right now but it's there's a tendency to do that I think that the the funding of the network is going to be is going to be an interesting problem overall because you know when i wrote that those comments there was still a bit more time before you actually got that reward having as you get closer and closer to it the potential to actually change that and actually move towards a fee-based model get smaller and smaller so i think that you know unless there's

a big speculative bubble and you see the price of bitcoins double there's going to be some significant amount of hash rate that has to be powered down I mean actually the one one thing that's been quite surprising is that there hasn't been a significant reduction in hash rates over the last year while the prices would drop but I mean people have been turning mining off but actually other people clearly been turning more mining on and so there has been a steady hash rate increase so which is gonna be technology driven but it's actually surprising that there haven't been larger chunks the network shut down and we like my guess is that people who've got the most efficient mine you kept it running so far I don't find that so surprising at all I mean if people have the

opportunity or think they have the opportunity to make money they're all wasting an investment even and and I think most people don't understand you know some of these very complex sort of models that were discussing here and now they're gonna play it well any jokes at the people putting millions into hardware do we have some sound clue what's going on well I may not be decades may not be the case I mean I think in some cases you've certainly got some miners now who've been around for a while and they're making a long-term bet on the future of Bitcoin in the long term bet on the fact that that that investment is going to be worth something over the long haul even if it's not necessarily making the money in

the short term I think they're making it bet that they they want to be doing this for four other other things in the future potential so I recently read interview of jama tony's and one of the things he said there i thought was quite interesting and you said that the sort of flip side of the idea of increasing the block size is changing the reward scheme and basically questioning whether bitcoin really should be limited to 20 1,000,000 and whether we really should have that having off the block reward every four years do you think I mean to me it seems clear that politically

there's just no way this is gonna be touched I think bitcoin will crash and die and collapse before people will come to an agreement that that can be changed I think so i think that the the majority of people who've been mining in the holding substantial amounts right now are basing the fact that you know they know that there's a declining amount of bitcoins come a tone in the future so they're assuming that what they invested in early on is going to be worth more over time because there's not new ones going to be coming on becoming available I think the bigger question really is about the nature of consensus within the Bitcoin network consensus both at a protocol level but

also consensus about what the core devs do and how Bitcoin as a system is actually allowed to evolve so I mean if you if you start changing the reward structure I'm going I actually proposed you know changes just so hard heartedly really but if you start making those sorts of changes and accepting the fact that hard Forks are okay then where do you draw the line no is it okay to define that the heart there's a hard worker says well we're not going to reduce that the mine reward or you will change it so it's on the declining scale so it steadily degrades off what other changes do you make at the same time and that to me I think is one of one of the bigger problems with this whole discussion about the block size what

what's the next one you know what where do you go next do you say well in nine months time if all of the large miners say well we're going to pull all our ashing on the day that the reward half because when I was going to make any money anymore then do you have a knee-jerk reaction that says all we've got to change the minor reward structure how should those decisions be reached well I'm not sure they can be reached on I think part of the problem is that you have a design it may not be perfect but you know making fundamental changes to it is actually very very tricky and I think there's also a longer-term question right now we can actually have this discussion about making those sorts of radical changes because the relative the number of nodes is relatively small

and the complexity of those nodes is there basically you know servers and large pcs so they're all basically the same if you'd actually had a ragingly successful bitcoin in which you'd had millions of embedded nodes they're all running full nodes as opposed to running anything else you couldn't even have this discussion because vast amount of the network would never accept the change and I think that's actually one of the things that's unclear to me we sort of able to have a conversation about changing it simply because it's not been massively decentralized as soon as it becomes massively decentralized then you can't make those sorts of change anymore and then the only option really is to evolve the value of the system to

something else and and so rather than saying you change the nature of what bitcoin is right now you have a Bitcoin to or a Bitcoin three or whatever you want to call it where you have a mechanism to actually moves the value from the existing system into that next system which has the different set of rules and I'd guess that that's been a large amount of what the blocked stream guys are doing and the side chains ideas is actually going to lead towards some of that sort of thing it will allow people to think about how can they move value from the existing system to something else part of the problem I guess is that everyone is so a bit nervous about you know how to wait for those sorts of things to happen but arguably that is the safest engineering

course would be to say we'll keep it the design as it is we know that there are some things we don't like about it but we're working on approaches that will allow us to actually my great things in different ways a little bit of course it seems like if you do that you're always just sort of kicking the can down the road right i mean certainly true i mean it but what a list you do get the ability to do is actually run meaningful experiments to work out what the next thing should look like that the worry with a with the hard fork is that once you've made that assuming that the majority people actually accept it and that that hard fought sticks then you now end up in a different situation suddenly you've gone from an unknown in

a situation where you've got a relatively known problem to a situation a bit further down the track where you have a completely unknown network and unknown centers and I think the worry there is that you know you need to do that analysis and that's that's one of the things that I haven't seen right now which is surprising there hasn't been that analysis of what actually happens when you migrate to that Network what does that actually look like what does it what does it mean certainly it's going to delay the introduction free market by having larger blocks but does it actually introduce any vulnerabilities in the system does it mean that potentially miners change their incentives and right now for example most mining pools are accepting

reasonably large blocks I mean the vast majority of them will take at least a 750 kilobyte block out of the non one megabyte they can take and some number take a full megabyte but if you actually were to allow 20 mega byte blocks potentially that puts some number of murders huge disadvantage and they may actually just decide to actually artificially clamp the size of blocks they'll be all words to something much smaller because it actually makes more sense for them to run with a smaller size so I think that again this is where ever some some analysis needs to be done so how optimistic are you that all these things will somehow get resolved and there will be the good outcomes reached in all these different risks and

scenarios and that we will be you know here talking in five years about the Bitcoin that's now being used by 500 million people so I think that there are there's actually some other fundamental challenges certainly you want to get to 500 million people using Bitcoin the big challenge there is that even if you make the block size 20 times for this right now you still can't do that many transactions on it so you're going to have to see things move to other sort of payment channels you're going to have to have side channels of one form or another that will allow things to happen off the main chain and I think that's actually the thing that's that's potentially most interesting that's also where you get the potential for most innovation people can try ideas out and

they can still use the main change we're actually moving that's a baka valley around it loses some of the decentralized sort of ideas it loses some of the thought that this is completely and you completely trust us in the sense that you don't have to trust anybody but I think for the vast majority people if you want to actually you see Bitcoin adoption that's going to have to happen anyway we've already see it that the exchanges effectively do that anyway so you have to put seller manda trust in somebody to do things the right way so I think the potential there is for those organizations to become more transparent so if you have to trust them but you can verify that they've done the right thing

then that's actually a really interesting model so what you're saying here is that then Bitcoin becomes a settlement mechanism and transaction get so one one example of this is a lightning network of force which we talked about on this show right do we get in a situation there what because when I think about this I have a difficult I have it's hard for me to to see how that would happen so that we would have options transactions for the majority of transactions and Bitcoin being used as a settlement mechanism and at the same time being able to use Bitcoin to do small transactions if you wish so if you want to be transparently

you want to be completely well someone anonymous and and use Bitcoin for small transactions you could but it it seems unlikely that Bitcoin will be able to be used as a clear as a settlement mechanism and also for just day-to-day transactions if one wishes to do so doesn't that go sort of against the corporate double principles of what bitcoin is so I I think that there's no reason why it has to be two different things I think you certainly could have those micro transactions being handled via some other mechanism and then being settled on the main chain in fact in some respects is easier if you do have that same unit being used to those transactions but I mean certainly you

have lost some of the decentralization at that point so the question you have to ask is from an end users perspective do they actually care about the decentralization so much or do they care about the transparency of the system gives them and does that allow them to do something in a way they couldn't do with any previous sort of systems and i think that the technology behind bitcoin allows that and i think there's a lot of people trying to work out how you can do those sorts of things and you still do have the ability there's nothing to stop you from from actually making small payments using the using the main chain if you do so it's just the cost associated with may be higher yeah but so that's so what I mean is then I think that that would be undesirable if you're stuck having to

use some off Shane solution because the cost for transactions on the Bitcoin block chain on the main chains are so high I don't think that's a very good outcome for Bitcoin as a whole so I I think one of the bigger questions long term is you know that has to be a question how do you align all the economic incentives I think if Bitcoin had be able to stay on a very very highly decentralized network where basically you were piggybacking on a vast number of people's compute power then it's very very easy to sort of say well okay everybody's carrying some of the costs for the mecca for the network and therefore everybody can take some benefit from it as well it becomes more

tricky when you end up with sort of the centralized mining infrastructure's we have right now I mean they are there's a lot of centralized mining effectively happening right now because those guys are controlling the security of the system and they're also the ones who are you know extracting most of the value from it right now because everyone's taking minted coins they're the ones taking the transaction fees so I think there's there's some some questions in terms of that that mining infrastructure but I think for Bitcoin as a whole I don't actually see that there's a huge problem with having off chain payment mechanisms as long as those off Jane payment mechanisms can actually support the sorts of capabilities that the main

chain itself supports they the only thing that potentially loses some of the anonymity which I suspect the vast majority of users isn't actually a huge d or if you'd actually more than anything you you know who knows right right I mean with lightning network potentially has more anonymity one of the one of the things you mentioned when we were talking about topics before is zero accepting unconfirmed transaction of that practice what have you and that so I think that in the current network 00 confirmation transactions are worrying I think that that there was a certain amount of resistance to some of

the recent software developments that have tried to make them highly unreliable but to a certain extent the genies out of the bottle there you know once people realize that zero confirmation transactions are risky there will be but they aren't risky right now right they well they're not risky as long as the mining pools actually don't accept replacement fees and and so you know double spends are something that would only be a problem if mine has been prepared to say are there's a bigger food associated with this so the replaced by fee for example would potentially allow a double spend or even a triple spend at the same same points and so anyone who's receiving

those is at risk if they actually try and do anything without waiting for a sufficiently large number of confirmations but I think that that's actually a natural phenomena that's going to happen I mean we've already seen with the spontaneous forks that happen not that long ago you have mining pools that aren't actually running for validation and full replication of transactions so relying on the mining pools to actually do anything i think is questionable at which point you have to argue that the whole idea of zero confirmation transaction is is actually itself highly debatable wait just gimme can you explain what you mean by mining pools and i doing for validation of transactions so there was some number of the mining pools who were basically

doing an SPV verification they weren't actually doing full verification because they could gain a small advantage in terms of how quickly they could process things and so we had i forget the exact date was a couple of weeks ago where we had effectively a fork where certain mining pools weren't actually taking into account one of the new forms of transactions it could be applied it could be used and so they were effectively creating a second chain and so but but they weren't basically they're basically weren't running full notes they were running a lighter weight version of a verification so what are you suggesting for payment

processors like beat pay and coinbase and bitnet etc because it's a pretty miserable user experience right if you can rely on so just anti-crime payments yeah I mean I think the trick is that with those guys who are acting as payment processors to a certain extent they they have to take a judgment on the risk that's associated with doing it so they might actually take take a few that the risk is small and there may be some heuristics they can come up with that actually measure what the real risk is and this is another reason I think statistics are really interesting for Bitcoin network if those guys have good analysis of the actual real double spend attempts and they can see any patterns

to those they can see what the actual risk is they can actually take a judgment as to whether they want to accept zero confirmation transactions or not I think that the the bigger risk is for anybody in general taking those zero comp transactions and I'm in commercial entities can obviously make their own judgments about whether they'll accept them or not I mean the other risk with zero confirmation transactions is really that if you look at the original Satoshi white paper there's a an analysis there of what would actually be a safe number of transaction confirmations to to get a certain confidence level about whether something can be reversed or not and this is another area that again I think

the statistics can help with where if if your largest minor controls less than ten percent of the mining hash rate and there's no collusion between miners then you know sort of six confirmations is great because you get a very very low probability of six confirmations being overturned if you have a situation where a minor is much larger then the risk is that there that you need a dramatically large number of confirmations to avoid all to get same level of confidence that those transactions can't be overturned and so I think that that's actually another area where potentially when you're talking about low confirmation rates not necessary zero but but low confirmation rate confirmation numbers

you actually need to understand how centralized the network potentially has become the more decentralized it is the smaller numbers you actually need today's show is brought to you by our friends at shape-shift shape-shift is the fast and easy way to trade all coins they now support over 40 of the most popular altcoins including flooring coin I aucoin positron infinite coin and so many others when you want to trade all coins forget about using exchange that's so 2013 men just go to shape-shift thought I oh and get it done unless one minute with no counter signup required the currency conversion tool makes trading all coins just about as easy as using google translate and we've also got some news for you shape you've just put out an iphone app here is my iphone

and here's the app for the iphone is the iphone app for the iphone and you'd think that if you would make an iphone app that then you used to exchange all coins well you're going to have to go to one wallet to send it to another to get the address than the shape shift to like executed you think that would be a pain and a lot of copying pasting himself well actually it wasn't it was super easy i put a little bit of Bitcoin in to get some gems in my mhms wallet and it literally took about 30 seconds so that they've done an amazing job at that so if you have an iPhone use our favor and download the app if you are someone like Sabathia who uses android then uses do yourself a favor throw away the Android

get an iphone and then download the app so we would like to thank your friends a cheap ship for supporting the show and you know go to shape-shift video give it a try so you you work at pier nova so you've been involved with mining at that company and also worked in chip manufacturing can you talk to us about what what what you see as the future of mining so I think mining is actually very interesting mining intrinsically is something that's going to burn a lot of energy and so it has some some implications because of that I don't know anybody who's yet come up with a

good proposal how you avoid that as a problem I think there are some intrinsic challenges though for mine which is that you really want to find a way where in some respects where you can actually avoid it sort of running away and just consuming vast amount of energy that would be a sort of a desirable thing I don't think anybody has a good solution that yet but I think that trying to find solutions to that would be extraordinarily useful and if we can find a way of doing that that would be a huge deal I think the other challenge is if you want a network which is largely based on having a you know no centralized point of trust within it there has to be some work done in terms of decentralizing the mining itself and

not not actually the hashing the hashing is the least interesting part of the decentralization there has to be a big push towards decentralizing the transaction selection and transaction processing so this is really down to the way the mining pools work for example you we really need to get to a stage where there are no large mining pools and that may not be something as possible within the current Bitcoin network it may be possible I'm incentives possible the heart walk but I think hard folks themselves a problematic but I think that's another area needs to be looked into because if you could have a thousand pools each of which control point one percent of the

network and could be demonstrably not actually colluding in some respect you have a much better decentralized network the worry right now is that it's very easy for one- again a very very large share the total a charade and then it'd be very difficult for anybody to necessarily know that's happening one mining related story that has always gotten a lot of attention and it sounds really exciting it has been 21 Inc no they've raised a ton of money and from what they've told it sounds like they will put miners in toasters and on the moon toilets and

and and shoes perhaps who knows but no basically embedded in devices that has never made any sense to me I don't understand it right now and you actually worked at Qualcomm which is an investor in 21 Inc what is going on with that so I have no idea what Qualcomm we're doing I actually have a bunch of people at Qualcomm be really interested in Bitcoin for various reasons but none of them as far as I've aware were involved in those discussions either the I the idea of actually embedding the mining into lots of devices is great in one respect which is that if if you could actually couple that with decentralizing the mining pools as well then it would give you a

tremendous amount of decentralization but when you actually start to run the numbers I don't think it adds up from it from an economic perspective and I don't think it adds up from work from an energy perspective the energy in people's homes is usually pretty expensive it's not like the hashing would be free it's not like a byproduct of something else that's happening already so I think that you know from up from a global energy perspective that doesn't make any sense and I can't see how the model at you know we're 21 provide the chips to go into all these embedded things I can't see how that would work economically in anybody's interest anyway apart from you know 21 potentially because in order for them to

actually gain any transaction fees or get gain any mining fees from that they're going to actually act as a huge pool so 21 suddenly become the biggest pool in the network which doesn't seem like it's actually decentralizing anything they've decentralized the hashing and centralize the control of that hashing so that doesn't make sense either I mean it isn't it sounds like they their idea is to run a massive botnet write effectively that's what it seems like I mean it also makes very little sense in terms of power and the devices that are actually naturally connected one of the problems is that you need devices that are actually going

to be connected well and you need that to provide some utility to the people who are going to be powering that hashing so you know it makes no sense to me to say you're going to be collecting a few so a few hundred Satoshi's a day from your toaster because what are you going to do with them there's nothing useful to do with the status of a smaller quantity and also your toast that's not networked right now so from an end users perspective there's a huge problem which is if you suddenly have to network your toaster well now you've gone from you know your toaster which is pretty unintelligent you've never to have a CPU in there you've got to have a mind chip in there you've got to design this thing so it can you know connect to something else equal Wi-Fi in there and then I

don't know if anybody's actually spent a lot of time with Wi-Fi but I used to work on Wi-Fi design and there's an awful lot of Wi-Fi access points out there that will fall over if you put too many clients on them so you know you're toast it could be one device too far and suddenly on network stop work stops working that's not a great end user experience you know you put them in your refrigerator or the refrigerator's using somewhere inaccessible probably doesn't have great Wi-Fi coverage Iver so these sorts of things don't really make a lot of sense and there's a thought experiment last year I was actually thinking about you know does it make sense to put these things into something like a router as I used to design routers it on paper that's the natural place to put sort of a hashing engine if

you're going to do one but then there comes a cost problem which is those devices are designed with a certain thermal footprint they're not designed to go above a certain temperature the enclosures are designed to run without fans as soon as you start putting any sort of high energy consuming device in there those thermal devices but those thermal characteristics are out the window you need more expensive enclosures and it suddenly starts to get more expensive to run so not only does it cost you more energy but it costs you more upfront as well so it just seems like it it doesn't work as a concept so is there there's no way you can think of that that their fans make any sense I keep trying i haven't found one yet but I know good luck to them if I can find a

way of doing it well I mean one interesting area to perhaps consider would be central heating if you could have a central heating component in the house that then distributes a heat a ventilation system and you get some mining reward from that would that be a good good idea I sure even if you have something which already takes electricity needs to generate heat then that would make some sense I I think another one I heard somebody suggested was like greenhouse heating things like that for growing things those those make sense because you're already turning electricity into heat in the first place they're not necessarily most 9 a-6 aren't the most efficient way of doing that but you know at least there is some value there because the intent was

originally the burn energy to actually generate heat in the first place but I think that the question then becomes is the most efficient way and would people sign up for that for large-scale heating and of course even the issue of course is like saying people do sign up on a large scale for something like that well I mean the thing is with Bitcoin of course that would mean difficulty Rises and then the revenues would drop again right so like this seems to be like no way this makes any sense exactly unless of course you were to do hard work and save the 21 million cap disappears and you could now start having keep collecting bitcoins forever at so I want to ask you regarding the the ASIC chips

so I believe we're getting towards the threshold in terms of what the those chips are gonna be able to produce and hash rates like physical nanometers and that especially knowledgeable about chip manufacturing but you mentioned in a talk that we were coming to that threshold and also something interesting you mentioned that in terms of energy savings as we were getting towards closer to that thresholds the energy savings began to drop so does that mean that as chips continue to evolve there will be more expensive to run and secondly what comes after asics like

what comes after we've reached that threshold and can't go any further I think lots of people like to know what comes after a six although this is in Intel and everybody else yeah if you actually look a bit coin I think we mentioned earlier it could become sort of raced through five generations of Technology in five years which was absolutely astonishing and you got to the stage where you 28 nanometers or 20 nanometer devices which are pretty much state-of-the-art for what most people are using at there are a few 916 I guess 14 as well but those are you know at the moment those are leading edge devices I think there has been some discussion of some research now that would take us

down under 10 but I mean the amount of time just to go through those generational gaps is getting bigger it's getting harder and harder for the scientists to actually come up ways of actually shrinking things more than they have already so every so often you know people say oh we're not going to get any smaller and somebody was finds a way of doing it but it's taking longer each time so bitcoin has reached the point where the asics are pretty close to the best they can do in terms of the geometry I mean yes the geometries will continue to shrink and you know as those technologies become available you'll be able to use those for hashing as well and that will certainly improve the power efficiency for that generation but you're then dictating the pace at which

you can do things based on you know what the semiconductor fabs can do and can they actually can they actually produce anything smaller or more power efficient so the other problem is that as these things get smaller it used to be that you sort of get this sort of square law game where as everything haft in size the has the power efficiency would go as a square of that and that's not happening so much now so that's actually pretty tricky and the other thing is if you look at a Bitcoin ASIC it's doing a fairly simplistic test there's nothing too complex with it it's pretty well defined there are some optimizations I think most of them they're already being taken you could certainly do some custom layout that's going to improve these

pair efficiency and I'm sure the guys at 21 looking at this and others so you can get some some improvements there but there's a limit to how far you can take that because what a Bitcoin ASIC does is already highly specialized so I think that you will see it near Bitcoin at this point that the hashing will basically follow the same trenzas cellphone processes and and other cpus you're not going to see dramatic gains and so this floor on things I was a predicted of last year was that there would be a slowdown in the hash rate where the the increases was now be pretty much dominated by just the pace

of general technology and replacement of previous generations of hardware so Bitcoin e-cigs and become sort of subject to the same problems as the regular yeah that they've hit their existing yeah they've hit the limits of the physics right now okay so Dave we're kind of at the end of our show we've gone peed on and before we wrap up so you work for pure Nova a zero something like a few sentences you can say about the company and maybe if people want to learn more about it where they can go sure so I'm obviously we start out in the Bitcoin space we firmly believe that

the technology that's used in crypto currencies and crypto logisys extraordinarily useful we have our own take on that and so we've been working on some stuff that I guess we will be announcing more in the next couple of months I I think unlike a few other people we decided we didn't want to talk about it until we finish building it or at least you know building building a good working prototype but we're looking at building things on on a different scale so we're looking at how you can get the same sorts of guarantees and the same sorts of characteristics that you get with something like a Bitcoin network in terms of transparency and in terms of the ability for somebody to verify that's correct but apply those

for other applications so we're looking at building sort of vast blockchain like things but without and being exactly the same as a blockchain so we have stuff up on our website now in fact we would just change the websites like there's a little bit more on them there was before and I guess we'll be announcing war in next next couple months cool thanks so much and of course we will have links to this and also to your blog and into some of the articles we read in preparation or all end of show notes so a day for thanks so much for coming on okay thank you very much so also some announcements first of all I signed a job so I'm going to be sort of a full-time employee I

think is the time when this this podcast comes out so I would be doing business development so be the head of business development at arras industries and some of you may know that because we've had them on the podcast before a person burn a while ago and well I won't talk too much about it now I'm really excited about it I think it's a great company in a great great technology but i'm sure i will talk about it more at some later stage regarding epicenter you know we'll keep doing this in the same way so there shouldn't be any changes there and and another thing is that so we have decided and since you guys have not been very

not been very good listeners in terms of leaving itunes reviews we we've decided to resort to low active driving and little tactics so you have some of these t-shirts so what we've decided is that once a week if someone leaves you reviews we will give you a will send you want a t-shirt and it can be negative review it can be part of you doesn't matter you can write whatever you want but yeah so if you want to do that to send us an email at show at epson a Bitcoin with the sort of link or reference view and we'll send you t-shirt or ally will draw one a week so it just like droves if you're doing it and yeah of course since we have no way

of identifying you on on on itunes it's important that you send us the you know send us an email to let us know that you've written a review is so that we can identify you so let's show at episode i become calm and by the way congratulations on your new job right yeah thanks i'm excited yeah so thanks so much for joining us so we put out new episodes about Senate between every monday you can subscribe to the show in itunes soundcloud or of course in whatever podcast app you use and you can watch the videos and youtube com / epson or BGC and then yeah that's it so thanks so much and we will be back next week