Jan. 25, 2023

Nashville Energy & Mining Summit 2023: Proof-of-Work - What It Is and Why It Matters

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Citadel Dispatch

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This conversation was recorded at the inaugural Nashville Energy & Mining Summit, a two-day event at Bitcoin Park in Nashville, TN that brought investors, policymakers, energy producers, and full spectrum Bitcoin mining operators and service providers together to discuss the current state of bitcoin mining and forge a path forward.

Recorded: January 12, 2023

Proof-of-Work: What It Is and Why It Matters

Fireside Chat with:

Bitcoin Park is a community supported campus in Nashville, TN focused on grassroots bitcoin adoption and a home for bitcoiners to work, learn, collaborate, and build.

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01:45 - Introduction of Matt O'Dell and his involvement in Bitcoin

05:00 - Importance of proof of work in Bitcoin

12:00 - Fair distribution of Bitcoin through mining

19:00 - The resilience and uptime of the Bitcoin network

21:00 - Divergence in attitudes towards mining in different jurisdictions

23:00 - Bitcoin's impact on discussions around energy generation and delivery

24:00 - The global free market for energy enabled by Bitcoin


Can I introduce you then, or would you like to introduce yourself? You can introduce me. So this is Matt O'Dell. You probably know him from RHR, the number one Bitcoin podcast out there in my humble opinion.

Seriously. I think so. Thank you. Yeah. Bill is in Bitcoin. He's probably number 462.


he does a number of other things. He's a partner at 10:31.

He also hosts his own podcast at dispatch.

He does a number of open source supported initiatives from OpenSats.

We work on a project with Wiz on Bitcoin TV.


Am I missing anything? Yeah. I mean, there's probably, like, 15 other things that you do. But I had a very humble 3 rig mining operation that I didn't get wrecked on. Woah. Let's go.


People are, like, just barely clapping because of how wrecked they got on phone.

Okay. Awesome. And I'd like to introduce,

a big friend of the park,

Harry Sudhak. Harry is the chief strategy officer at Grid Infrastructure.

Harry's been kind enough to travel from New York. I think this is now his 4th time,

spending his time with us, presenting, speaking,

staying until, like, midnight, talking with all of y'all about Bitcoin, Bitcoin mining, life, and so on. So it means the world when you spend all your a lot of your time with us. So can you guys give these guys a round of applause? Let's



I wanna be on this side of you.

My good side. Thanks for joining us, Harry. Thanks for hosting. So, I mean, we're running a tiny bit behind schedule. Right? We're good?

Okay. Awesome. 30 minutes plus 15 minute q and a. Get your questions ready.

Hit Harry with hard questions.

First of all, good morning all.

It's a pleasure to be here.

We will be talking about proof of work and the importance of proof of work.

And I think for this audience,


y'all are more predisposed to


on the importance of proof of work and the difficulty adjustment and everything else that makes Bitcoin possible.

So with all that said, Harry,


at at the core, why is it essential that,

Bitcoin relies on a proof of work system and Satoshi decided to go that route?


So I think I think it's important to just talk about what the core innovation in Bitcoin is. Right? Bitcoin's not the first

Internet money or or digital cash project to have existed. There's a long sort of history in the nineties and early 2000 of other attempts to do that, whether it's eGold

or eCash or other other projects. But there's a reason that Bitcoin worked,

and solved, you know, an actual computer science problem.

And and the trick with the computer science problem is the ability to make sure that the double spend

problem was solved without a trusted third party. So Bitcoin works because I can send Bitcoin, and nobody can stop me.

And the way that Satoshi

arranged the different components of the system in a unique way was the combination

of proof of work,

the difficulty adjustment,

and applying those 2 developments

against a hard cap supply.


what is proof of work? It is the

contribution of computing power

in order to process new transactions, include another block on the blockchain. So

the difficulty adjustment is if everybody realizes that you're gonna get paid 50 Bitcoin plus the transaction fees for those early blocks, we're all gonna chase those new Bitcoin.

So when 10 new computers join the network,

the network automatically,


makes it more difficult

to get to the new block

after the after what's called a a difficulty adjustment, difficulty retarget.

And so this is this is critically important because what it does is it lets the

overall system

be self adjusting

without the need for anybody who would come in sort of with an external,

force and try to tune things. So the reason why when you send a wire from your bank,

the money is only spent once is because the people at the bank are moving the numbers in the database.

In Bitcoin, there is nobody moving the numbers in the database. There's just the system running on a decentralized

broad basis. And and the reason that you're able to to achieve this kind of core function,

is because you've removed the middleman. You've removed the third party

by utilizing

a proof of work consensus system.

But there I was having conversation,

last night with with mister Alex Thorne from Galaxy, and and he made a great point that I hadn't thought about in advance of this topic, which is that the other thing the other piece of fairness

that Satoshi offered

to the Bitcoin,

ecosystem with a proof of work based system is just fair distribution.

Right? So if you wanted to get Bitcoin before you know, in in 2010 or there there might not have been an exchange. Right? So the only way you could get some Bitcoin

was to

run a node and mine on your computer.

And so what that did was it got Bitcoin into the hands of a lot of different people, and it made those net new Bitcoin available,

on a fair basis. So all you need to mine Bitcoin at that time is just computing power, and it's the same today actually, is just computing power and electricity.

That doesn't matter if you live, you know, in a country who has a totally destabilized currency.

If you can get electricity

and you can push that electricity through a computer,

you can participate in the Bitcoin network the same way as everybody else.

And so this fundamental,

homage to fairness baked into the DNA of the system, both in terms of how do you get net new Bitcoin, but also how do you make sure that nobody interferes

with the throughput of transactions

is is utterly foundational to the system. And if you didn't have

either of these kind of capabilities, we wouldn't be here today.


Love it. I mean, let's unpack these different,

these different aspects here. I wanna start with,

fair distribution because,

Silicon Valley VCs love coming up with these ideas to do this brilliantly fair distribution around the world.

I think Sam Altman recently had his world coin where he was gonna have orbs in developing world countries, and they were gonna scan your eyeballs and then give you a certain number of shitcoins in return for it.

In your opinion, how does that fail

versus Bitcoin? Now how is Bitcoin's distribution superior to that?


Yeah. Bitcoin so so, you know, I think that we we're often tempted to,

think we're smarter than we actually are,

and and ego and hubris gets in the way when we think, you know, we know how to centrally manage a system, and and the market is is dumber than me.

But what Satoshi did that was that was so effective was, you know, he basically or they basically said,

these are these are just gonna be fair on a market basis. And if it works, it works. And if it doesn't, it doesn't. You know, it's the it there's the this idea of, like, the the watchmaker. Right? The watchmaker puts the watch together, winds at once, and then it's up to the wearer to keep the winding going.

And that's exactly kinda what what happened is that, you know, Satoshi released the an open source project, dropped it on a mailing list, and, you know, Hal did the first transaction. And then it just snowballed

very, very slowly. But

the lack of central planning,

and the

rules over rulers approach to the fair launch was just that the rules were going to be fixed and set and predetermined,

but not the mechanisms that happen after the rules were set.


Right. I mean, the way I like to look at it is Nick Szabo has his famous paper, trusted trusted third parties or security holes.

Satoshi devised a system

that allowed you to cryptographically

verify that distribution

was was fair, and and anyone who contributed work got equivalent amount to Bitcoin without a trusted third party because, otherwise, you end up in these situations where,

you know,

fair coin for the world. You hear it all the time. Like, this idea like, oh, you're gonna check a driver's license. You're gonna check


eye scans. You're gonna DNA records. Like, there's always a trusted third party that has to basically do this verification process, and you never know if they're gonna print their own money. Well, and and this is why you have to talk about the the proof of work plus difficulty adjustment, which is, like, if you like, you know, we we've spent a long time since Bitcoin sort of was was started, but pull up a block. Right? Look at how a block is constructed. There's the block header that tells you that the difficulty adjustment was

was conformed to. Right? This is a valid block because the number of leading zeros is enough.

And so you're able to see in every sort of bit of the the data and the information that is available to you and available to all of us publicly

that the the difficulty

of the of the block is valid. Because, right, like, you could you could find a block that has sort of a a faked difficulty. It just wouldn't be it wouldn't be validated by nodes. And so you can see that that the amount of work that went into that block is correct.

And then you're also able to validate and audit the entire history of all the transactions. That's the the running of the node from scratch thing that we should all be doing.

And so you're able to to do these 2 different types of audits to prove that the system is working the way that it was described.

And so, therefore, the Bitcoin that you have,

is is valid. Right? There's no other monetary system where you're able to to independently validate that you have what you what you're told you have.


It's pretty amazing that so many people, even people that are very active in the crypto space that have tons of capital that they're deploying throughout,

just there's this mass there's this massive disconnect that they think the technology the breakthrough is blockchain or distributed ledger technology, but the real breakthrough is this distributed proof of work,

and the difficulty adjustment along with it, and they just they completely missed that aspect.

And then they devise all these other schemes as a result of trying to

you know, based off this logical inconsistency that they started with. And so,

another thing here is let's let's unpack

the difficulty adjustment. Let's unpack

this idea that Bitcoin has 99%


Very rarely goes down. I mean, we had I don't know. What are they giving they, like, come up with a new name every time. Like, the the,

Arctic blast we just had,

where 40 percent 40% of the hash rate went off the network,

and the Bitcoin blocks kept coming in.


Yeah. The the this is, you know, this is what's so interesting about, you know, the the changes in sort of the density of the network from, you know, even 5 or 6 years ago, the the advancing of and professionalizing

of the mining industry,

in part is a function of

technology. Right? The chip technology that we're that we're utilizing to generate hashes now is so much more


and and improved. And there's actually there's a good graph of this where, you know, Bitcoin ASICs

lagged the leading edge at foundries for, like, the first 7 or 8 years,

of the of the network. And now we're sitting right at the front edge along with sort of the the most advanced chips in other industries. So there's been this this,

convergence point that we've that we've reached over the last couple of years. But the the

resilience of mining farms and facilities, the resilience of the overall network, there are, you know, enormous businesses being built on top of of proof of work and difficulty adjustments.

Certainly in the US, there's many of them, and there's others overseas. And and these are core to the way that the network functions in that, you know, the the quality of operators has has totally transformed. It's not somebody's garage. It's not something fly by night. These are these are enormous and exciting businesses,

and they're businesses that are delivering value for Bitcoin, but they're delivering value beyond Bitcoin as well. Yeah. I mean



I we just take it for we take it for granted. The the difficulty adjustment, we take completely for granted. And it's actually not just the difficulty adjustment. This

this rough,

this idea that, like, okay. So let's just unpack the 40% hash drop. Let's just because that's crazy. Right? Yeah. 40% hash drop now But let's quantify it. Right? Like, how like, that's that's million it's a 1,000,000 plus servers. All drawn off at the same time. All drawn off. More or less, like, in the same, like, 15 hours or something. Set of our windows. And you know what didn't change? Block time. But so that wasn't even the difficulty adjustment that protects Bitcoin in that situation. In that situation,

blocks start coming in slower because the difficulty hasn't changed yet. And as a result, because blocks start coming in slower,

transaction fees start to increase because people want their transactions to get included in the block. And then as a result, any miners who remain online are making more

Bitcoin revenue. Yep. All without a centralized third party that's, like, pulling the strings, trying to reset the system, unplugged Solana, replug it back in.

That's insane.


Yeah. The the magnitude of the Bitcoin project in terms of CapEx dollars, in terms of human capital, in terms

of the economic value that Bitcoin represents all over the world, it's become

it it's crazy that there's an open source software project that's competing

with with global settlement.

Right? That's crazy. And it and it's crazy that there's no product manager or project manager in charge of the road map. You know? There's there's just a bunch of rooms with people like us,

and and it's delivering value every single day. It's it's it's this concept of uptime and reliability is something that,

that I think, like like, our frog has been boiled in traditional industries. Like, you know, if I want if I wanna get you know, I saw a great a great clip of this, but just, like, go to your bank and ask for a $100 in cash.

Just see if see if you can get it. Right? Like, just stress test your system. Go and see if you can actually get your hands on that.

And I bet you you can't. But if but if I wanna go move a $100,000

of of cash value in Bitcoin onto my USB stick,

it's gonna take me, you know, about 10 minutes to see that block and about 60 minutes to feel comfortable with it.

6 tran 6 transaction confirmations.

That's crazy. That doesn't exist anywhere else. And so, you know, we, you know, we get used to it because it works, and and we get comfortable because it has the uptime. But, like, the the the gap in between

what Bitcoin is offering to us versus what our existing systems are offering to us, that gap is only getting wider. It's all without a centralized third


party, which is crazy. No security goal. So, I mean, this is a little bit tangential to our topic, but I think it's an important

important aspect when, you know, we're we're setting up this great 2 days of conversations about mining,

is this idea of the Bitcoin token having a free floating value,

this idea that,

you see people come out of the woodwork

year after year. They say, you know, I like blockchain,

but, like, the Bitcoin token makes no sense to me. Like, we should just peg it to gold, or we should peg it to dollars.

But at the core,

you need the token

to be a native bearer token that is digitally native to the protocol so that it can pay the miners without a trusted third party.


I feel like that is lost on a lot of people. I I think that, you know, and we and we'll get into this in sort of like a like a what's what's everybody else doing.

But there's this there are these concepts of endogeneity

and exogeneity. So what what endogenous means is is what is what is happening within the system. Exogenous is what is happening outside the system. So what Bitcoin is the best at is drawing a clear line in the sand about what is supposed to be self referential

versus what is supposed to be outside referential. So the

the difficulty adjustment is is actually an exogenous

concept. Right? It's a concept that's related to the the number of miners that are operating

and the electricity

and the infrastructure that's built up around them. Right? So Bitcoin is tethered to the real world. So if you wanna add hash rate to the network,

you have to go hire a general contractor to go build you a mining site. You gotta go call 1 of the ASIC manufacturers and place an order, and you gotta go figure out what money you're gonna spend on all that stuff. So there are these there there's a forcing function to tie the Bitcoin system to other real world



And so that's very valuable in maintaining the lack of a trusted coordinator or a third party. But then you have to think about what does Bitcoin do self referentially.

The self referential part of Bitcoin is the tokens,

is the having,

is the the 21,000,000 hard cap. And those are all self referential concepts that are enabled without a trusted third party because of this exogenous,

externally referential concept,

that's existing sort of in the way that proof of work is delivered to the market.

This is wildly different than what a proof of stake system does, for instance. And, like, this is the key difference is, like, if you run a proof of stake system, it is it is foundationally

self referential across the entire system. There's a great, I forget if it was an interview or a tweet that Vitalik

gave where he basically says, like, you know, Bitcoin lives by the rules of physics, and Ethereum lives by the rules that we are able to construct in our simulated reality. He's like, we can make our own decisions. Better. We can do our own reality. And I'm like, well, so it's never. That's a totally dysfunctional way of trying to design an independent decentralized,

you know, system where the asymmetry is given to the individual rather than the centralizing authority at the middle. Right? If if you wanna be in charge of your own money,

don't do that.


Yeah. I think he said that in a Ethereum core dev call.

Yeah. I mean, it's really interesting. Right? So one of the things at the park that we're very focused on is is trying to empower the local community and also empower other people that are trying to empower their own local communities around

the country.


you know, that has been a very fulfilling process, but it it mostly takes,

you know, people caring and, like, actually

wanting to support their community. But on the mining side,

it's pretty amazing


just from the incentives alone,

you have all these actors around the world

that aren't necessarily

working together



but, individually,

because their incentives are

find cheap efficient power,

help, you know, whatever wherever their locales are, make sure that they're in a solid stable situation just out of out of sheer greed or capitalism

or incentives that they end up empowering


a lot of communities and improving our infrastructure is pretty crazy. Well, and this is what what to return to, like, the fair distribution concept in Bitcoin, what proof of work and mining represents is equality of revenue.

Right? There there is no no terahash is treated


based on jurisdiction,

based on, you know, energy type or source or or any of this. Right? Like, if I generate 1 terahash hour, no matter where else on the planet somebody else generates a terahash hour,

they have a claim

on revenues

equal to mine. And so

my job as as a miner and all miners' jobs is to is to deliver those TeraHash hours

in as efficient a way as possible. Right? Because

revenue minus costs equals profit. So

the the incentive is to deliver TeraHash hours as economically as as viable,

and that makes a bunch of different business models available

that didn't exist before. And that's how you end up improving infrastructure

in places that, you know, maybe didn't have an energy buyer, so you couldn't justify a project, for instance.

But this this idea that that, you know, Bitcoin is equally available on a per tera hash hour basis,

like like, that's what makes this fair.


I'm curious what your thoughts are on

and I guess this is a little bit tangential to I'm curious what your thoughts are on

this kind of divergence we're seeing in America, but then also globally, where


community leaders

are encouraging miners to to come in and

and increase their base load, right, and and and give them, you know,

more efficient built out infrastructure, basically fund that infrastructure for them. Right? And because miners can just turn off at will,

unlike, their miners are often compared to data centers. But the difference is you can't turn off a Netflix data center because if you turn off a Netflix data center, then no one can

stream their favorite movie. But with Bitcoin, it can be on demand. You can turn off. And all of a sudden, we've seen a lot of jurisdictions kind of encourage miners to come into those places. But at the same time, we see jurisdictions like New York that are going the exact opposite way. Right? Where they're trying to basically push out miners that they're threatened that miners are using too much power. Do you see that divergence


over the next 5 years, 6 years, or

is there gonna be like a are are are are we gonna see most jurisdictions start to kind of welcome it?


The short answer is, like, both and yes. Right? Like, there there's enough jurisdictions that are out there where we're gonna see all the behaviors. Right? And and, you know, it's gonna be it's gonna be everything kind of under the sun. I think, you know, this gets at this sort of more foundational problem, which is,


Americans are pretty

energy illiterate. Right? And and that's not our fault. It's just, like, the this energy system that powers our lives has become extremely abstracted away from our day to day. And so, you know, we

we hear about it when there are, you know,


Nordic, megalodon vortexes,

that that that come that come out of the ocean and eat our children.

You know, and that and then we're and then everybody wakes up and says, like, oh my god. Our power systems are so screwed up. Like, we need to revamp them, you know, or or we need to go pass 1,000,000,000,000 of dollars of legislation to go, you know, build things that that may or may never exist.

But, you know, so so there's this there's this incredible distortion in our literacy

around how

energy is generated, transmitted, and delivered. And so I think where I'm very excited and bullish on Bitcoin and proof of work is that

if you asked me 10 years ago, am I going to be able to get this group of a 100 plus people together to talk about electricity,

the answer would have been no. But because of Bitcoin and because of proof of work and because of a new business model, which is industrial scale mining,

we are getting really smart people together who are having

complex, nuanced, and important discussions around how electricity is generated, transmitted, and delivered, and what does that mean when it's deployed as a tool for human flourishing.

Those conversations are actually happening. We're seeing, you know, interesting things happen, you know, all over kind of the the infrastructure stack,

as it exists.

You know, I'm I'm a if you if you've seen me speak before, you know I like the Nuke.

And so

so, you know, I think there's a lot of exciting stuff that's going on going on there, but but, you know, really, what what's the most important part is that we have a new business model. It's proof of work based. It's Bitcoin enabled.

And so we're gonna deploy that business model into any jurisdiction that's willing to kinda meet us where we are,

as an industry

and and grow into sort of the next iteration,

of the American electric system.


I mean, it's more than just a business model. Right? It's a global free market for energy that's never existed before.

That's fucking insane.


You know, the this and and and just to just to beat a dead horse, you know, this is why

Bitcoin needs to be paid careful attention to for the 0 to 1 innovations

that it represents.

Provable digital scarcity, credible sound money,

no trusted third party, settlement finality,

new market continuous bid for megawatt hours.

Add that to the list.


Love it. Let's give Harry a huge round of applause.