Podcast: Daniel Frumkin on Mining Pools' Endgame

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Synopsis: 

In this episode of The Sazmining Podcast, Will speaks with Daniel Frumkin, Chief Executive Officer at Metro Bank. They discuss Bitcoin cash, centralization issues in mining polls, how mining pools have evolved, and more.

Will Szamosszegi (00:28):

Sous today is Daniel Fromkin and he's the chief content officer at brains, a Bitcoin mining analytics firm. One of his goals is to educate Bitcoiners and everyone really about trends such as repurposing waste energy and renewable energy arbitrage made possible by Bitcoin mining around the globe. So Daniel, thank you for joining me today.

Daniel Frumkin (00:50):

Thanks for having me. We'll really looking forward to it.

Will Szamosszegi (00:52):

So let's just dive right in here. First question. Uh, when brains was started back in 2011, what was the primary focus of the firm and how did the company end up going into what you guys are doing today?

Daniel Frumkin (01:06):

So brains was co-founded by Jan and Pavel who are two guys, two check guys with both having backgrounds in engineering programming, and Y's background in particular was embedded devices, which Asics are type ASIC. Mining rigs are a type of embedded device. So when they got into, when they founded the company, they were actually not doing anything related to Bitcoin mining. They were just doing embedded devices, engineering, and consulting type stuff. And the way that it transitioned into now being a fully dedicated to Bitcoin mining is that Pavel was actually childhood friends with mark Plaus nickname slush, who was in Bitcoin since either 2009 or 2010, but he founded slush pool in 2010. And by 2011, maybe even earlier, Jan and Pavel and mark were all sharing an office together in Prague. So mark was running slush pool, doing all of his Bitcoin projects, Y and P were doing their own thing with other engineering projects.

Daniel Frumkin (02:08):

And around 2012 and 2013, they started talking more about Bitcoin and Y and P were getting into it a little bit. And then in 2013, mark had the team and the idea to go pursue hardware wallets. And he founded Satoshi labs with a couple of partners and they they're the ones that produced treasure. So at that time it was queer. Like the pool was already overwhelming to operate as a solo thing. Like mark was working full time on the pool, and then he wanted to go do this other project. Uh, so basically he went to, to Y and PVO and, and asked them if they were interested in taking over operating the pool. And by this time they were, they were fairly interested in Bitcoin and, and thought it was a good idea. So mark switched over to Satoshi labs, full time, basically, and Y and PVO switched over to slush pool full time. And brains has been a Bitcoin mining company, a hundred percent ever since then.

Will Szamosszegi (03:08):

Wow. So these guys were in it really early. They've been, they've been at it at it for a while now. So they saw it all the way from that time up until I think a big defining moment for the industry was obviously in 2017 when you saw that division and the hard fork, really. And I mean, being in the position that you guys are in, you guys have some big decisions to make, what are you gonna support? Are you gonna support Bitcoin Bitcoin cash? So could you talk a little bit about that process, what that decision making process was like, why you guys decided to, to go and support Bitcoin instead of Bitcoin cash. I'm sure that there's a lot of different variables that were part of that,

Daniel Frumkin (03:50):

For sure. So probably the most important context to have there is that at that point in time, the mining industry in particular was maybe the most Chinese dominated that it's ever been. Uh, so you have Bitmain as the weeding hardware manufacturer, but, and all hardware manufacturers really at that time were, were Chinese, but Bitmain had at least like 80, 85% market share and Bitmain was pro big blocks. They wanted Bitcoin cash or what became Bitcoin cash. So they're controlling both the hardware supply chain, and then they also have massive influence in the pool industry because they're the owners of basically they're running amp pool. They also control Bitcoin btc.com. And then they have investments in other pools that are Chinese based or claim to be based elsewhere, but almost every major mining company at that time could be tied back to Bitmain somehow. So Bitmain had really, really massive influence on the industry.

Daniel Frumkin (04:51):

And that was why, why there was so much concern about big blocks. And at that time, because the thought was minors are going to support big blocks and what's gonna happen then even if the nodes and the users don't support it, Bitmain alone has enough control and influence in this industry that maybe they can bring the majority of hash rate over to, to what became Bitcoin cash. So the way that brains and slash pool handled, that was first thing before the, the hard fork actually happened. There was the opportunity for minors to kind of signal what, what they supported with their hash rate. And while all of the Chinese pools just did whatever pool operators wanted to do. Slush pool was the first one to introduce a voting mechanism for the users. And basically the idea was this is not technically our hash rate. It's all of the minors connected to the pool.

Daniel Frumkin (05:46):

They're the ones that actually own the hash rate, but we're the ones that are constructing the blocks. So we're the ones that will, will actually signal what we want. And so the idea of voting was like, what's listened to the users and what they want and let them signal what they want. So basically just put out a vote through the, the email system or something like everybody submits a form, what do you support? And then that's tied to their hash rate. And then we have a, a breakdown of like percentages who supports big walks, who supports small blocks. And then we can signal according to what the users want, as opposed to just whatever we want and the, the users of slush pool favored small blocks. So that was the first thing is like, we kind of immediately took the opposite side of Roger VE and, and Bitmain and all those, uh, companies and mining entities that were favoring increasing the block size limit.

Daniel Frumkin (06:39):

And then when the hard fork eventually happened, then there's the other decision that you mentioned of like, will we have a Bitcoin cash pool? And that was kind of the same thinking as, as with the voting mechanism, it's like, we we've always been a Bitcoin first company. Our, our like company brains is led by engineers. It's not led by business people. And our engineers like understood what the trade offs being made. There were, they favored decentralization over like transaction throughput and they believed in the, the SEG and lightning network and way or two scaling plan. So on the one hand, it's like we could potentially make more money by opening a Bitcoin cash pool. The same could be said for Ethereum and, and a bunch further, a coins that we've never opened pools for. But at the end of the day, we like prefer to focus on Bitcoin. And it's been that way from the beginning since before most of these alt coins even existed. And it would've taken a lot of engineering effort to create that Bitcoin cash pool and maintain it. Would've had to like dedicate resources to it that we prefer to dedicate to Bitcoin. And then anybody who wanted to mind Bitcoin cash it's other pools were supporting it. So like, you could go ahead and do it, but we've still to this day, like all of our resources, all of our focus goes towards Bitcoin.

Will Szamosszegi (07:59):

That is great to hear. And I think that a lot of people don't really understand how big of a decision that was and that you guys played in that. And, and that's incredible to hear. I mean, what do you think would've happened if at that pivotal juncture, the majority of pools went and supported Bitcoin cash instead know it's all hypothetical, but I'm curious to hear what your perspective would be, uh, knowing everything, you know,

Daniel Frumkin (08:25):

I, I would like to believe things would've worked out the same way, but maybe it would've been a little extra stressful and difficult for everybody who wasn't supporting the big box, because ultimately it's not like slush pool is the, the sole entity that prevented that we were the main pool outside of China. We were the main ones supporting Bitcoin, keeping the small blocks. But at the end of the day, it was like the threat of the user activated soft fork and the signaling by the, by a majority of nodes or a large portion of nodes that, that they preferred small blocks and like all of the social pressure and the community coming together, which ultimately is what turned it into a hard fork as opposed to, well, a hard fork that, that Bitcoin ended up maintaining the majority of the value as opposed to it being like fully one sided where a hundred percent of the mining entities wanted bigger blocks and, and Bitcoin cash. So I think it was important to have slash pool as like somebody on the side of the group that opposed the big blocks within the mining ecosystem, so that it wasn't just fully one sided.

Will Szamosszegi (09:33):

Can you walk me through the centralization issues that people talk about when they talk about mining pools? I think that a lot of times these buzzwords will get thrown around and I don't think people really understand a lot of these mechanisms at play when you're talking about centralization versus decentralization and how mining pools tie into that,

Daniel Frumkin (09:54):

For sure. Yeah. The, the mainstream media pieces on Bitcoin mining very often, uh, make it sound like the fact that there's four or five pools with the majority of the hash rate means that those four or five pools control the network if they want it to pollute. And that's like, that's just not how it works. Uh, so maybe the most important thing to understand for people who aren't mining or aren't, uh, familiar with how mining pools work is that basically all of the miners are putting a, a certain URL into their, into their mining machine that says, I want to mine with this pool and they can put multiple pool URLs. Like they can have a, a primary pool, a backup pool, uh, or any number of backup pools, depending on the, the firmware that's running on the machines. You can even split the hash rate from a single machine to multiple pools in the events that minors are unhappy with their pool, or they see their pool participating in something nefarious, like maybe block withholding or mining, a bunch of empty blocks that technically shouldn't be happening or whatever the case may be switching to a different pool.

Daniel Frumkin (11:05):

That's not doing that takes about two, three seconds. It can even be programmed in that. Like if you see X, Y, Z behavior automatically switched to my fallback. And that's the case for cases where it's not nefarious behavior, but maybe, uh, for example, a month or two ago, there was a period where China just had just put the, some of the mining URLs behind their firewall. And some miners were having connection issues with Chinese based pools because of that. And, and there were server issues and stuff. And in those types of scenarios, a lot of minors will have it set up that like, okay, I haven't been able to reach my pool for one minute or two minutes or whatever the case may be switch to this other pool automatically. So like that type of infrastructure is already in place with the majority of large minors in particular, but even small miners can do this.

Daniel Frumkin (11:58):

Like, like I said, a single machine can point its hash rate at multiple pools. So centralization at the pool level, there there's like some risk there, for sure. If all of the pools decide to CLU and there's, and there's no pools that are being honest, then we have real problems, but that's just the game theory of Bitcoin. That's, that's incredibly unlikely to happen. Some pools trying an attack would be an opportunity for other pools to gain a lot of pass rate. And that's what I would expect to happen. So there's some tiny risk there, but it's, it's very, very tiny because of how easy it is to switch between pools. And there's really no incentive for pools to do this. Like they would be losing their, their entire business long term for whatever, like trying to do a double spend or something. It's, it's never gonna work out economically to, to try and attack as opposed to mining honestly. So the only reason it would happen is if like a government takes over a bunch of pools at the same time, and I don't believe any government is technically competent enough to even do that. But if they were, we would, it would be interesting to see how quickly miners would respond. But I would, I would not be too concerned long term about the health of the network, even in an events like that.

Will Szamosszegi (13:13):

It's funny hearing it laid out like that because it really is almost like the perfect checks and balances within the Bitcoin network. It's like what human systems we haven't been able to do. For example, in the us, there is checks and balances, but it doesn't operate as intended. Bitcoin is shown over the amount of time that it's been around granted not a long time, but in that time it has shown a proper checks and balances, and it really hasn't failed or crumbled once in all of those years where there have been multiple attacks on it. So it's really fascinating to think about.

Daniel Frumkin (13:48):

Yeah, absolutely. Even on that note of checks and balances, there's the, the possibility of nodes all come in together and rejecting blocks from an attacking entity or entities that even if let's say 60, 70% of minors are doing something that the majority of users don't want them to do it, it would be technically challenging, but nodes could still come together and start rejecting those blocks and keep the Bitcoin chain with honest minors, not trying to do reorgs and double spends and stuff. So like checks and balances are, are really, really beautiful in the Bitcoin system.

Will Szamosszegi (14:24):

Yeah, for sure. So to change gears a little bit, I'm wondering how have mining pools over time evolved. Cause a lot of people really look in and they don't understand the inner workings of how these mining pools are interacting with the protocol. And if you were to just talk about how or some key events that have happened over time and how mining pools have evolved as a Bitcoin network has grown. Uh, I think that that would be, that'd be really helpful.

Daniel Frumkin (14:55):

So I guess the first main event is the creation of mining pool is like, why did they have to be created in the first place that's that happened in 2010, late 2010 as more people started to mine, it became, there was probably several hundred and then eventually a thousand or 2000 different people mining some with multiple computers. Eventually some started doing it with GPUs. And as that happened, it meant that individual minors became less and less likely to find blocks in a reasonable timeframe. And so mining pools were created initially as more people started mining just with CPUs and GPUs in order to stabilize the revenue for those smaller miners who weren't likely to find blocks every day or every week or even every month. So that's when spool was created and a couple other ones were created around that same time way, 2010, early 2011, everything kept operating pretty well for those maybe first year, year and a half.

Daniel Frumkin (15:55):

And then as GPUs gradually took over gradually and rather suddenly I guess actually, uh, when GPUs were taking over, then there became, there was some problems with, with like the mining pool infrastructure that was originally built for just the laptops and, and desktops that were mining. And at that time, mark Plaus, who's running slush pool in order to solve that he developed stratum protocol, which was launched in 2010. And that was basically a communication protocol in between minors and pools that allowed them to send data back and forth more efficiently and securely basically, really it was about efficiency. Uh, so it made it so that pools had a easier time validating the work that minors were submitting to them. And, uh, minors had an easier time receiving block templates to work on and, and everything was done in JS on so that it was human readable and people could troubleshoot easier and builds, build new stuff on top of it.

Daniel Frumkin (16:54):

And that protocol was so successful that it's still being used to this day, even as we've had an evolution of hardware from CPUs to GPUs, to F PGAs, to now Asics, which are pretty much the only thing that's viable to mine since 2015, 16, if not sooner. And through all that time, shred and protocol has been serving the needs of minors and pools pretty well. So that was 2012 that that was launched. That was a huge event. The next big thing is probably the introduction of Asics, which was 2013, but they really took off and became dominance 2014. And around that time, I think that's when mining really started to concentrate in China because of the advantage that miners had there with proximity to the hardware manufacturers. And because it was so much cheaper to manufacture the hardware in China than anywhere else, they gained dominant market share on hardware manufacturing, and that led to dominant market share on the mining itself.

Daniel Frumkin (17:52):

So that was a very big thing where the industry transitioned from being a lot of people in the us mining and, and Europe and all over the world to, to having the majority of cash rate be in China, which is presents a lot of challenges, namely the language barrier and the kind of partitioned communities that exist because Chinese social media is totally different from, from Western social media. So there, there was not a lot of like communication between Chinese minors and us and European and, and other Western minors. And the same could be said for the mining pools. So that was probably the, the big trend from 2014 to up until that Bitcoin cash bared for and at that time slash pool was the only major pool outside of China. And it stayed that way until 2020, I wanna say is when some other Bitcoin mining pools started popping up in there's SPI crypto in Japan and a couple in north America now.

Daniel Frumkin (18:49):

So the reemergence of mining pools outside of China is a really big thing that's been happening recently. The largest mining pool in the world now is Foundry, which is based in the us of course, and probably the defining trend for now is vertical integration of mining pools, which is a result of the fact that, uh, something started with the Chinese mining pools. And now it's just become the defaults in the industry is erase to the bottom end pool fees that it's basically no longer profitable to run a mining pool. And it's extremely difficult and complex to run a mining pool. So not only is it not profitable, but there's a lot of risk involved and a lot of like operating expenses involved in doing so. And so as a result to make running a pool, a good idea, you basically need to have other sources of revenue where you get the hash rate into the pool, and then you sell those mins other products so that you can actually run a viable business.

Daniel Frumkin (19:53):

So in our case, we focused a lot since 2018 on firmware for the Asics, which in 2018, we launched it with supporting ASIC boost and then with an open source firmware implementation, which basically just software that made the machines run about 13% more efficiently at no extra cost. And we released that free an open source. And then in 2019, we realized there's a real demand for even better firmware, which can also play on the, the Silicon lottery a little bit, which means like basically each individual mining chip and be a little bit different just because of the differences in Silicon quality and, and other small factors. And the firmware from the hardware manufacturers typically treats those chips all as the same, it'll send the same frequencies and voltages to all of the chips and for, for brains firmware and other third party firmwares, the realization was if you figure out which chips are higher quality than others, you can actually calibrate frequencies and voltages and get better performance from the machine, just with software tweaking, no hardware modifications at all.

Daniel Frumkin (21:02):

And because you can do that, you make more Bitcoin per unit of energy that you're consuming per wat. Then we have something that we can viably charge a fee for because we're providing enough value. Like if a minor gets a 15, 20% profitability uplift and we charge a 2% fee, then we're no longer stuck in this race to the bottom on pool fees that we have, because we can sustain on the firmware, which is providing enough value to minors to justify that kind of fee. So that's been our, our main focus in order to keep the pool running and remain a, a viable business long term, but other mining tools have done different types of diversification. I think the most common being financial services, like once you mine, the coins, you can put them into a custody service and then you enter some yield on it or things like that.

Will Szamosszegi (21:52):

Got it. So the, the firmware piece where you're getting more performance outta your minors, that's what you guys were, are doing with, uh, brains OS plus exactly where, and that's where you're, you're doing exactly what you just explained, where you're trying to maximize the actual hardware efficiency based on the routing in the Silicon chip.

Daniel Frumkin (22:14):

Exactly. So hash rate is dependence on the frequencies and the chips, and you can find which chips like through calibration process, basically auto tuning is just try a bunch of different things and see what works the best and gradually like narrow in on that and find those settings. Um, and then it's also, it it's enabling a lot of customization because, uh, you can set your power consumption at a wide wide range of limits. For example, with an S 19 stock consumption is 3,250 Watts, but with brains west, plus you can auto tune it down at 1500 Watts find like your really efficient settings that are going to maximize your BTC per wa of energy. But at the same time, you're not going to have as much overall production cuz you're running at that willpower setting. On the other hand, you can over clock with the stock PSU, you can over qu into the 4,500 wat range with a custom PSU. You can do it 6,000, 7,000, even 8,000 Watts on an S 19. And you can almost double the hash rate of one of those machines just with the software. Uh, and there's all kinds of complexities that go into that like immersion cooling and, and custom PSU and different things. But basically it's, it's enabling a much more customizable way of operating machines and operating mining farms at large.

Will Szamosszegi (23:40):

How do you view, I mean, that, that's so fascinating cause I've talked with other minors as well talking about, oh, well you can try and overclock and get more performance out of the same hardware. And I'm assuming this makes an enormous difference in terms of equipment longevity. And then you're wondering, how do I plan this out? Based on my farm. My question for you is how do you see immersion cooling versus air cooling, affecting the longevity of chips?

Daniel Frumkin (24:06):

Um, I, I think immersion cooling is not over Heights and I think it's very, very height. So <laugh> I think to put it together with the firmware thing, like if you have air cooled machines, you don't really wanna push those more than maybe 20% above stock power consumption because then you're getting into those machines are gonna be producing a ton of heat and dissipating that heat's gonna be really difficult. So maybe if you're in Iceland or Siberia or something in the middle of winter, you could overclock and you'll be safe because it's just so cold outside. But for the majority of minors who aren't in those freezing cold conditions, overclocking in air is going to damage the lifespan of the machine. For sure. And it's also increasing your short term risk of things like overheating causing a fire, whatever the case may be. And primary reason that hardware lifespan degrades is that you have fluctuations and temperature and the different components of the machine might respond differently to those fluctuations.

Daniel Frumkin (25:10):

So like maybe the Silicon is expanding as it's heating at a faster rate than some of the, uh, the metal components in the machine. And then that causes things to Mo move around just a little bit. And eventually that happens enough times that the machine starts to degrade in performance or even stops working altogether and immersion prevents that because the heat density of the coolants and immersion is so much greater that there's not really the, the possibility of having such wild temperature swings, as long as you have, like your system is operating properly and you have, your pumps are managing the flow of the fluid through the tanks and stuff properly. Then you don't have to worry about the temperature of the fluid on the chips swinging by 10 degrees Celsius in a, in a couple of minutes and damaging the hardware. So immersion really enables a lot more flexibility in terms of what I was talking about before of operating the machines at at much higher capacities or even just changing the power consumption of the machine on a really quick interval where maybe if you're participating in some grid balancing program or something that you need to go from a hundred percent to 1% in under a minute, doing that in air means you're gonna need to still keep running your fans for a little while just to make sure that the machine's cool off properly.

Daniel Frumkin (26:30):

Whereas maybe doing that in immersion, you can just go straight down and the fluid's gonna take care of that heat dissipation and make it happen at a good steady rate so that the machines stay safe, safe during that time.

Will Szamosszegi (26:42):

Yeah, it's, it's something that it's been talked about for a while, but it just seems like just from <laugh> just from understanding how the machines run and how you're running them nonstop, it would be a lot better to have 'em in environment where you're trying to get multiple years out of these machines. You want 'em to be taken care of and liquid seems to take better care of the machines.

Daniel Frumkin (27:07):

So for sure.

Will Szamosszegi (27:08):

So going on, um, I wanna switch gears a little bit and talk about how you see the future of mining pools. And now that there's increase in competition, as you touched on these mining pools are going to have to find different ways and different revenue streams to become profitable. It could be the firmware, it could be financial services. Is there anything else there that we didn't touch on that you think might be adopted by certain mining pools or something that that is important to, to be aware of as we get further along?

Daniel Frumkin (27:39):

I think the end game for mining pools is basically do as many things help minors as you possibly can. So there are other things that you can do besides the firmware and the financial services like running hardware, broker services, or just being very well connected with hardware brokers and facilitating some of those deals. The fact that we as mining pools are connected with minors all over the world means maybe we have a little bit better knowledge about where some open capacity for hosting or where there's some energy sources that are untapped, that that could be used for mining or things like that. Or even just like personal connections with talented people that can fill roles around the industry like mining pools can be the ones providing all kinds of those services that help the actual minors with, with things that maybe it's not so related to the mining pool itself, but it's just like a, an externality of, of having a bunch of clients around the world that you're communicating with, that you, you have that extra value you can provide.

Daniel Frumkin (28:41):

Even in our case, we have a very small content team, but content for large minors, hasn't been a very big focus, whereas it's been a focus for us at least for the last couple of years, because there's so much MIS misinformation about mining that we really wanted to help people who are outside of the mining industry, understand things, better, understand what's going on. And now that more mining pools and mining businesses are in the us and Canada and Europe. That's not quite such a pressing need as it was before when it was all concentrated in China. But, but nevertheless, like we've developed this content team and, and we understand how to educate people outside of the mining industry on what miners are doing. And we can even offer that as a service to large minors that like, Hey, you guys don't need to worry about like your, your public communications as much because we can help you with occasionally producing some content to let people know what you're doing and make it really digestible for people who aren't deep into the mining game. So it's really tons and tons of possibilities for mining pools to continue providing value even after the pool itself is no longer able to differentiate from other pools because all pools will eventually have pretty much the same features and offer super low fees that there's not gonna be much to differentiate there. So it'll really be all those supplemental things

Will Szamosszegi (30:03):

As a pool. You're speaking with a lot of different minors around the world, lots of different people along that whole value chain. And you're seeing the different mining facilities that are coming up from your perspective, how do you see the energy mix of mining changing over time? Uh, because, uh, it's been one of the mainstream discussions and a really weird way for a while about the energy use of Bitcoin and, and the energy sources, whether renewable or non-renewable. So I just wanted to get your take from all the conversations you've been having and, and understanding how mining works. What do you think is primarily driving the, the mining industry?

Daniel Frumkin (30:38):

I think there's, there's kind of countering trends on the one hand, from my perspective, a viable energy source for mining is one that's economically feasible. Like whatever the source may be, if it's cheap enough that miners can be profitable with it, then they should be mining with it. And I think because of the other trends, like just the, the investment that's going into renewable and sustainable sources and carbon credits and all of this type of stuff, maybe taxes on emissions, like those, those things will continue to influence minors towards cheaper and probably more renewable energy sources, just because if you keep on adding extra costs to those non-renewable sources, eventually that it won't be competitive to mine with them. And I think that's the way it should be. It should happen as a result of the economics, not as a result of, you know, kind of bending the need to the, to the people who don't really even understand or care how Bitcoin mining really works, which I think is the majority of the people who are outraged about what they perceive to be environmental damage being caused by the mining industry.

Daniel Frumkin (31:47):

But what we're seeing from inside the industry is that one grid balancing is very, very real, like particularly in Texas, which is going to be the mining Mecca for the foreseeable future, with that ERCOT system. And with all of the renewables that they have in west Texas, which are relatively far from large populations, uh, primarily wind power. Like we need some demand response resources, uh, to balance our energy grids because, uh, people don't realize that like if you're producing the energy and you have nowhere to consume it, that's a real, real problem for the grid. You can't just store energy in the transmission lines. Like that creates a lot of problems. So you either need batteries or you need to consume it, or you need to not produce it in the first place. And mins are the ultimate demand response resource to be plugged in there because it's so easy to change that energy consumption, like with the snap of a finger.

Daniel Frumkin (32:47):

Basically you run a command with some software and you can go from 3000 Watts per machine down to five Watts per machine in a matter of a few seconds. And there's no other existing demand response resource that can come even close to that. Like other demand response resources would be like much larger industrial applications that they can ramp up and down, but they can't do it on a 15 or 20 or 32nd time scale. And they can't do it off. And for that matter, the fact that Bitcoin mins can get paid to turn off when the grid really needs the energy or at a minimum, they, they get a lower electricity price for making the commitment that they will turn off if needed that it makes it economically advantageous, really for them to be demand response resources. And that provides a great value to society because not only does it help us balance the grids in the short term, but then it's also helping us with the long term producing more energy, which is what we really wanna do. We don't wanna consume less energy. We wanna produce more. And

Will Szamosszegi (33:50):

That's a, that's a big key too, when you think about it. I mean, I feel like everyone almost tax energy use, but a lot of the things that we enjoy, I, I don't think we're gonna become a more productive society by consuming less total energy. I think the conversation should be framed in, Hey guys, how are we gonna more sustainably power our society and give everyone have produce enough energy as a society to support a lot of the people around the world who currently we don't have the resources to support from an energy perspective, uh, exactly. Bitcoin, as you mentioned, helps push that forward. It's very important.

Daniel Frumkin (34:28):

Yeah, people, people don't think about like poverty in terms of energy consumption because that's, it's always presented as like people who make less than $1 per day or people who make less than $10 per day. And like these poverty brackets based on income, but there's that same relationship based on energy consumption like poverty prosperity. On the other hand, prosperity is directly tied to consuming more energy. So the more prosperous humans become the more energy each human consumes to do the things that they want to do. Uh, and we can even see that with wealthy people in our society, like the wealthy people are the ones that are flying around on private jets and driving around on yachts and stuff. And that's consuming a ton of energy and they have a lot of wealth that enables them to do that. And meanwhile, on the other side of the spectrum, we have people who still don't even have any electricity to begin with.

Daniel Frumkin (35:22):

And there's all kinds of reasons for that. But a big one is like with political risk and stuff in some of those areas, it's just not economically viable to invest in producing energy, even where it could be produced. Like for example, Ethiopia has tons and tons of rivers that they could be producing massive amounts of hydro power, well beyond what they need themselves. And then they could be exporting the energy to all of their neighboring countries, but there's a lot of political risk there that probably disincentivizes people from making that investment and perhaps in the next five, 10 years, or maybe it's gonna take even longer. But if Bitcoin continues on the, the trend that it's on, perhaps eventually Bitcoin mining will be the thing that unlocks the, that extra power production capacity that exists. That it's just not currently the risk reward is not attractive enough for people to be doing it, but mining changes the risk reward on any large scale energy production project, because it provides a consumer of the energy that you know, is going to be there for every last wat that you produce.

Daniel Frumkin (36:27):

So it takes away a lot of the risk starting a new energy project, because maybe for example, with a solar project somewhere remote, maybe you have the capacity to build a large solar farm. You could produce a bunch of this energy, but the issue would, you invest all that money in the solar farm. And then it's gonna take two or three years to connect it to the grid. And you're gonna be producing energy that you just have to waste in that entire time. And then maybe even once it's connected to the grid, you don't have a population center close enough to consume all of it. So a lot of it continues to be wasted or you need to invest in really expensive batteries. And there's all kinds of supply chain issues with batteries too. And like eventually we're gonna run out of lithium to produce enough batteries that we need.

Daniel Frumkin (37:11):

So there's all these issues that Bitcoin mining just plugs in has the, the ideal solution or as close as we have to the ideal solution and makes it so that we can both produce more energy and a larger mix of that energy can be sustainable and renewable. And then there's other use cases not to keep rambling, but like consuming natural gas that would otherwise be vented and flared. Like that's a incredibly environmentally friendly use case for mining that no other industry or application can that use case as well as Bitcoin mining can, because one, it doesn't need to be close to the population center. So these oil and gas Wells are typically very far away from people and you could run that gas through a combustor, but then you still have to transport the energy somewhere. And that's very rarely going to be economically viable for most of those remote gas Wells, but you can just put Bitcoin miners right there and consume it and prevent it from being flared, invented, prevents methane emissions, do it much more efficiently, provide some economic value for the energy as opposed to wasting it from an economic standpoint.

Daniel Frumkin (38:17):

And all of that can be done in a way that's incredibly scalable and scale specific. So if you have a couple hundred kilowatts of natural gas production, then you put, you know, 50 or a hundred machines there, or a couple megawatts, then you put a few hundred extra machines there. So you can scale it precisely for what you need in each one of those locations. And like, there's no, there's nothing else that can do that. Like, it's incredible. How, how well Bitcoin mining fits for all of these applications that are actually incredibly environmentally friendly.

Will Szamosszegi (38:53):

Yeah. For, for the flare gas, you put it there, capture the flare gas, run the mins for the renewable projects you put 'em there. It's easier to plan projects makes projects more economically viable. You have more solar with in Ethiopia, as you've mentioned, there's a lot of energy that could be built around getting captured, exporting that energy in different types of ways through industry instead it's wasted, um, without mining. And so yep.

Will Szamosszegi (39:21):

With all this said, it, it seems pretty clear that the narratives starting to shift, you're starting to see more people understand exactly what it is that you're talking about in terms of the applications of Bitcoin mining. So with that said, what do you think is happening over the next handful of years in the energy sector because of mining? Uh, I think it's, it's pretty clear through a lot of the conversations I've been having that the energy companies, they're not completely asleep at the wheel, they see that this is happening and they're trying to get involved. And then you have the large miners trying to figure out how this crossover is gonna happen. So from your perspective, what do you think, what do you think is gonna be going on here in the next? I would say, uh, two to six years, I'm gonna go, uh, based on the having cycles.

Daniel Frumkin (40:10):

<laugh> yeah. Perfect. This is the, the thing that makes me the most optimistic about Bitcoin in general. I just see energy, anybody involved in the energy industry. I see them all getting orange peeled in the next few years. I see a lot of them getting orange peeled right now from all parts of the industry. Like I talk to people doing solar and wind developments who probably would be in the, their people who are, who really care about having a more renewable denominated energy grid and energy mix. And they're starting to understand the way that the mining economics can help them produce more renewable energy. So they're getting orange filled slowly, but surely through mining on the oil and gas side, it's even much faster and larger because they've been getting demonized by society for years and years and years. And so they're a little bit more open to the idea that Bitcoin mining is actually environmentally friendly to begin with because they just see from their own experiences, the way that the mainstream media and, and people in general tend to misunderstand the value that they provide to society so that they can kind of relate with Bitcoin mins really well.

Daniel Frumkin (41:19):

And I'm seeing a huge, like the, the line between oil and gas, energy guys and Bitcoin mins is being boarded very, very rapidly. And I think those two industries are starting to gradually merge into one almost where I could see a future where pretty much every oil and gas company that has large operations is going to have to have some Bitcoin mining component to be competitive with all the other companies doing it. It's the same game theory that plays out with Bitcoin in general, I think plays out with Bitcoin mining and energy production, and it works for nuclear. It works for oil and gas. It works for solar and wind. Anything that Bitcoin mining can make more economically viable. It's just like inevitable in my eyes that that that's going to happen. That those people on the energy side of things are going to start to understand Bitcoin and mining is the, the portal for them to do that.

Daniel Frumkin (42:12):

And I think once, like that's a lot of really, really smart, talented people in our society that once those people are heavily orange pilled, I think that they go on and they're the, the next step in the network effect that they then take its all of their relatives who really trust them because those are, those are people who understand energy really well. So when they start to say, oh, Bitcoin mining is, is really great for the environment. And Bitcoin is really great for society then their friends and family believe them because, because they're coming from a like well educated and balanced perspective. So I think in order to orange pill society at large, we will need to have people who are a little bit less just adamant Bitcoiners and libertarian and, and all of these things. People who are a little are relatable to the, to the average person, the typical person. And I think that those, those people from the energy side who are getting orange filled now can be that, that real, uh, next leap forward in the network effect.

Will Szamosszegi (43:14):

I, I completely agree. I think that it's gonna be fascinating how that plays out and I agree that that's the type of world we're moving towards. So after everything that we've discussed here, what's the most exciting thing that you're seeing right now that we haven't touched on yet?

Daniel Frumkin (43:31):

I have something not necessarily directly mining related, but well, yeah, it is. So I I'm in SA Paulo, Brazil right now. And I've spent most of the past year in Latin America, between Mexico, Columbia, Brazil, and then a brief time in Paraguay. And the most exciting thing for me right now is realizing that south America and Latin America are going to be major players in the mining industry. When the China mining band happened, I was not over the moon, happy about it because at the end of the day, China in the us are competitors in a lot of different aspects and having two countries who are that competitive with each other, both be major players in the mining industry. I viewed as great for decentralization. I didn't want, you know, the concentration that was in China was too much. I wanted the us to continue to gain market, share other places, continue to gain market share and China lose market share, but I didn't want China to go away.

Daniel Frumkin (44:32):

It would be nice if China has 25%, the us has 25%. Europe has 10% south America, 20% stuff like that would, that would, that would be a great distribution. But the trend that we're on now is the us becoming dominant, not to the same extent that China was at its peak, but maybe even the us becoming, you know, 40% of cash rate per perhaps even a majority of total network cash rate. And I view that as a risk, perhaps even greater than China, the, the risk that China posed because, uh, the issue with the us would be regulatory captured as opposed to what China people are worried about. Like the government attacking Bitcoin by taking over mining operations and pools. I think with the us there, the concern wouldn't be a direct attack like that. The concern would be the us government regulating minors, heavy handedly, to the extent that Bitcoin loses some of those features or at least a part of some of those features that make it valuable like censorship resistance and maybe permissionless of mining also decreases a little bit.

Daniel Frumkin (45:38):

And so from that perspective, I really wanted to see hash rate growing elsewhere in the world outside of the us so that we would decrease that risk of regulatory capture of the mining industry in the us and Canada for that matter. And so that's, what's so exciting about realizing that south America can be that place to gain a really significant market share. It's not gonna happen overnight because infrastructure takes a long time to build. And there's not the access to capital markets and stuff in south America that we have in the us and Canada. But I do see it happening over the next three to five years where we could see really, really Sable mining operations and a sizable percentage of the overall network cash rate being in places like Paray, which is producing tons and signs of hydropower. Brazil has a lot of energy resources spread around, uh, particularly in the north, I've heard about like wind.

Daniel Frumkin (46:35):

They're also sharing a lot of the hydro that's produced at the, the EIP U dam border of PUA Brazil. Argentina has really cheap energy from a couple different sources, uh, natural gas being a big one. Venezuela obviously has tons of minors already who are also heavily orange peeled because they're the people who, who really need something like Bitcoin to, to, to survive really like a single amp minor S nine can, can produce more value for a Venezuelan in one day than they might make an entire week or an entire month working a, a typical job there. So I'm most excited about hash rate coming to south America also because I, I love spending time here. So it's, it's provides a good excuse for me to, to keep doing that.

Will Szamosszegi (47:23):

Yeah, that, that's incredible. So I've got one final question for you. It's a tough one. <laugh> okay. What is one belief you hold to be true that the majority of people would disagree with you about?

Daniel Frumkin (47:35):

I feel like because Bitcoiners generally hold a lot of contrarian beliefs. I'll go with a belief that a lot of Bitcoiners would disagree with me on as opposed to the, a bunch of normies. Yeah. So to speak. So that, that would be universal, basic income. I actually believe universal basic income would be like progressive for society. Just briefly. The reason why is that? Like, I only believe this in the, in the events that it is replacing the welfare system and replacing any minimum wage mandates. So basically my idea is the welfare system has a lot of bad incentives. Mal incentives part-time work is disincentivized because you lose your unemployment benefits. And a lot of times you end up with less money working a part-time job than you would have if you just stay unemployed unemployment in general, like we saw during the early, the first year or year and a half of COVID people were making more money staying home than they were than they would be making from working.

Daniel Frumkin (48:33):

So that incentivizes them to keep staying home. And I think the main reason that people don't want UBI, Bitcoiners in particular don't want UBI is that they imagine everybody like sitting on their couches, doing nothing, because they're getting those UBI checks. I think that would be true for some small portion of the population that doesn't wanna do anything. But if I do nothing for a week, I'm absolutely miserable. And I think, and most people I know are the same way. Like sure people want to take vacations and stuff, but if you're doing nothing every day for a long time, you become pretty miserable. And I think what UBI would do is it would change the incentives in the labor market. And it would incentivize people to start doing different types of work. Maybe that, that gives them different benefits from what they would do today.

Daniel Frumkin (49:24):

So for example, somebody, maybe somebody really smart and talented works a job just because it pays them very well, but they don't actually want to be doing it. And they're just doing it to make that kind of money. And maybe their talents would be better spent doing something else in society. That's not as valued from a monetary perspective. It doesn't produce as much profit, but maybe it pro produces value in, in a different way. Like for example, if somebody wants to stay at home with their kids, like there's no economic value assigned to that job right now, basically you can only do that. If one of the, the two people in a couple is making good enough money that you don't both need to be working in a UBI system. Maybe we have a lot more stay at home moms and stay at home dads.

Daniel Frumkin (50:08):

Even that spend a lot more time with their kids, do a lot better job raising their kids. They don't outsource raising their kids to their daycare providers and school teachers. And then we end up with a lot more well rounded kids who didn't spend their entire childhoods like neglected by their parents because their parents were working 10 hours a day. Like I think UBI would have a lot of consequences that people don't realize just by providing that changing the incentive structure enough that people might change how they behave. And I think there's a lot of concern about it, just turning into a giant welfare state that when I look at it, as we already have a giant welfare state, like the government spending spent like $9 trillion in the past year. So I would rather have UBI than have the welfare state that we have today.

Daniel Frumkin (50:59):

That's got a bunch of bad incentives attached to it. And then on top of that, I, I just think it would help decrease some of the social division that we have if there wasn't this politicized issue, obviously there would be people who would be against UBI, but I think it would take us off of the slippery slope that we're on and put us onto a different one of like politicians promising higher UBI checks in order to get elected. And that's not a great thing to see, but I think it's better than what, what we have now. And the last point on that is that I think it would cause a lot of inflation, which we're already getting, but at least in that case, it's the opposite of the cancel on effect or like today credit creation, money creation typically goes to the wealthy first. They get the most benefit from it. And by the time it trickles down to the people at the, the lower income side of the economy, it's already like hurting them more than it's benefiting them because of inflation. So in a UBI world, I think we would have more bottom up inflation as opposed to top down inflation. And that would be a net positive for things like wealth inequality that causes a lot of social problems in society. So, yeah, that's my contrarian of Bitcoin belief.

Will Szamosszegi (52:13):

That's awesome. I, I actually want to dig in a little bit more on, on this topic, cuz you're the first person that's laid out, this, this thesis for a UBI in that type of a way in your scenario, you were talking about how it would be replacing the welfare system that we have today. So you would still be looking at having that level of spending or like, I guess in your type of a, a world with UBI, how do you see it being implemented and like what role a government play in that?

Daniel Frumkin (52:42):

Like in terms of the implementation? The biggest benefit I see is like, there's not a lot of bureaucracy attached to it. So with the welfare state, you have social workers who are checking. If people are applying for jobs that maybe they don't even actually want to get. Like I heard during the, the early like months in the first year and a half of COVID, a lot of people like just applying for jobs so that they could keep collecting the government checks, but not actually wanting the jobs because people who were employers kept on, like having people not even show up to their interviews. So getting rid of that part that just wasteful bureaucracy in the implementation. I really like that it's simplifies things a lot. You could basically just have automatic direct deposits everybody's bank account for every registered taxpayer and you don't need 40,000 social workers checking if people are, are doing things in order to get that money because you don't have to do anything to qualify for that money other than being a registered tax paying citizen.

Daniel Frumkin (53:42):

So there there's that in terms of actually paying for it, we spend trillions on the military, we spend trillions on foreign influence and, and programs and stuff that I don't think it would be terribly difficult to find the money to do it. You get rid of the welfare state completely. You get rid of minimum wage completely. I don't want to get into it, but it's, it's actually like part of a, a bigger worldview that I have of like how things could be improved. That actually I've talked with one of my best friends about it a lot. And it's more like his ideas than mine. I'm just kind of parroting them. But if we had a taxing system that was not based on money moving, like we have income tax sales, tax, corporate tax, uh, real, uh, property tax, all of this stuff. And pretty much all of those taxes are like when a sale occurs, a certain portion of it goes to the government.

Daniel Frumkin (54:34):

Yeah. So it means that every, like every dollar gets taxed into oblivion over a long enough time period. Because every time it changes hands, there's a portion of it. That's going to the, to the government mm-hmm <affirmative>. And I think like in this completely unrealistic utopia, which I, I don't actually believe that this is possible to implement, especially not any time in the near future. But if, for example, we just had a tax that was like, rather than the government, like printing money and, and stuff like that. If we had like a programmatic inflation on assets that the government automatically gets. So say like every single stock in the stock market in the us stock market has 3% shares are created out of nowhere each year. And the government owns them and they programmatically sell the same amount of those shares every single day. And that's how the government funds itself.

Daniel Frumkin (55:29):

And we get rid of a lot of the other taxes, like capital gains taxes, income taxes, et cetera. If we had that, I, I don't know the exact math, but let's say it's 3%. That would mean that like the ultra wealthy billionaires who everybody complains about, they don't pay their fair share of taxes because they don't need to move their money and, and create those events where they would be taxed. Well, now it's a non-issue because like they're, they own, uh, large portions of those stocks. So it's just inflating away value from assets as opposed to inflating away value from the money. And I think if the government was inflating away, value from assets, it makes it much harder to evade taxes. Because like with property, for example, if just 3% of the, you, you pay 3% of that property value to the government each year, then like your option to not pay that tax is simply not owning the property.

Daniel Frumkin (56:29):

And if you're in the us, like people always wanna offshore their assets so that they don't have to pay the, the us taxes on them. They'll offshore them to somewhere where they don't have as much of a tax burden or maybe no tax burden at all. Well, I think people wanna own assets in the us because the us is where private property rights are relatively good. They're they're well protected. So the assets have some value because of the lower risk in the us. So I think having a tax levied in that form, as opposed to taxing money on the move, it would not cause a lot more offshoring of assets because you still wanna own property in the us. That's where it's most valuable, cuz it's, it has those property rights attached to it. You still wanna own equity in us stocks. So I don't know exactly how it all worked out.

Daniel Frumkin (57:18):

And I, I don't think about it too much because I don't think it's realistic, but uh, like it's all part of the, if you could just design the system a new and forget about like all the issues that would come with getting political acceptance for it and, and getting politicians on board with something that would kind of make them obsolete. Uh, cuz ultimately like this, this system would simplify government a lot. It would get rid of a lot of bureaucracy and it would make most government jobs unnecessary. And that's a big reason that I like it <laugh> but if, if you get rid of all those caveats about why it's not feasible, I think it would work really well. It's just those caveats do exist in reality. So, so the, the more realistic answer is just like we're already printing massive amounts of money. We're already bailing out giant corporations. We're already bailing out banks. Like I think we have this corporate socialism pretty well established, like large companies do not have risk anymore because the government will bail them out. As we saw in 2008. And as we saw in 2020, and I think it's time to instead start bail out the people instead of the corporations and the banks.

Will Szamosszegi (58:31):

That is an incredible quote to end on. We'll end it there. Thank you. So

Daniel Frumkin (58:36):

For this.

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