TILP #3: What is Bitcoin - The technical side w/ Michael Schmid
ilm
In today's episode I'm joined with Michael Schmid now Michael and I we talked through a whole lot today. It's a great great conversation unveiling and de mystifying what is bitcoin. Not on the monetary side of things not on the theoretical but on a practical standpoint from the computational side. What is this Michael does a great job breaking it down in a very simplistic manner that someone like me can even understand if you want to learn more about Michael you can follow him on Twitter at schnitzel all right. I don't want to give intro too much about who big who Michael is or what he does you'll learn more plenty of that in this episode to come so let's get started.
00:00.00
ilm
All right? hey Michael thanks for joining me today. Appreciate you being here and I'm excited for our conversation. Yeah for sure. Well I guess before we dive in won't you go ahead and introduce introduce yourself and who are you and what do you do? and.
00:05.90
Michael _ _Schnitzel
Same same and thanks for having me.
00:16.55
ilm
Why would I have you here for a podcast.
00:20.12
Michael _ _Schnitzel
Cool. Thanks yeah, my name is Michael um, based on my accent probably your listeners can tell I'm not from the us I'm a Richie from switzerland grew up there and but was always always interested in the us specifically big the tax scene and. And then had the opportunity around 7 eight years ago to move to the us lived in Austin a couple of years decided at 1 point that Austin is was cool but I want to see more um than traveled all over the us in an airstream trailer and which was really nice to actually learn. A lot about the country that I didn't know a lot and also learned that a lot of the things that we learned from the media and the press is completely wrong and so did that for a couple of years and now I live in Virginia and in a small town in the middle of nowhere among 400 other people which. Is another new experience because I always lived in big cities before and but I'm really enjoying it. It's really cool. Um, yeah, my bitcoin story. Um I started quite early I think my first interaction I had is like 2011 um, where in the tech scene in surik there were people like really excited about this new technology and the problem was I had no idea how broken our money system is and coming from Switzerland it's pretty cushy like you don't have to worry much about.
01:42.94
Michael _ _Schnitzel
4 1 case and things like that just because the government takes a lot of this for you and also um, inflation and stuff is just not a big issue. Um, but only after I now move to the us so like in two thousand and Nineteen Twenty I realized how important bitcoin is for us. And from a monetary point of view because technically I understood it from the beginning but all right or I knew about it for a long time but only when I learned about the money part I really fell into the rabbit hole and went all in fall in.
02:14.61
ilm
And I didn't know that about you with the airstream. That's pretty awesome where ah where were some of your favorite places you explored during that time.
02:23.12
Michael _ _Schnitzel
Um, that's a good question. Um I think the places that we will really buy completely by ourselves one of them was like trochetary national park and there's a lot of blm um land so the bureau of lab management which is owned by the government. And you can basically just stay there for up to two weeks in the middle of nowhere so you literally like there's the highway and you go to an exit and then there's like gravel road and you just drive drive drive and you just hang out and we basically cooked every night over fire. We saw stars our dog just ran around. Um, off the airstream because for two weeks we saw nobody else like not even a car of somebody else and just that was really really cool.
03:09.26
ilm
That's awesome. That would. Ah yeah I used to try to get Kendra my wife to ah travel live out of rv for a bit but then we kept cabinvin kids and now we have four kids I think it's they'd be really tough to. Live it off an rv with our family that's doable. But.
03:24.58
Michael _ _Schnitzel
You with mad people that do it. It's It's quite a so it's like a luck going on. But um, yeah, it's It's a different life like we now realized yeah now now that we're working on On. Or planning on children and having more dogs and it's also nice to have a house like yeah, so.
03:46.31
ilm
Yeah, there's there's romance in the nontraditional lifestyle. But there's also you know practicalities with a practical normal lifestyle. So for right now I'll live ah vicariously through others. But Monday maybe.
03:53.70
Michael _ _Schnitzel
Yeah, yeah, yeah. No nice. Yeah.
04:01.92
ilm
Hey I wanted to have you on this. You have you definitely have a different way of viewing bitcoin and just ah experience and hands-on a relationship with bitcoin far beyond my personal ah technical prowess. But then also with. Really anyone else that I've talked with um from a just understanding the technology behind it how it works and actually you know working with it on a regular basis. Do you want to go and just tell ah tell us a little bit about like things that you've done talk to us about like ah your your mining and home and everything and then we can we can talk through like. They're really well on to get to today is talking with you about like what is bitcoin not on the monetary side necessarily but like actually how does bitcoin work. You know there's there's a lot of confusion around. Not only the bitcoin is. It's a lot in a lot of facets. It's we're trying to tackle. Economics monetary but're also trying to tackle like coding and ah energy policies like there's so many things tied up in here and we've we've spent some time in the last few weeks talking through the monetary side and that still leaves this gaping gap that I I certainly am not sufficient to fill with. Ah. Like how does it actually work the computing side the code sort of the history behind that like why bitcoin the security of it. So I'd love to hear that. But before we go there like I feel like you maybe talk to the audience about why you'd be a good person to talk with and some neat things about what you do from a you know physical.
05:34.63
ilm
Standpoint with bitcoin.
05:36.43
Michael _ _Schnitzel
Yeah, um, yeah for me right now today that I'm mostly work in bitcoin is has all to do with mining and the specific case of mining which means home mining and. If you try to mine at home. 1 of the problems is that we all very have very high electrical costs compared to like industrial rates and so mining only becomes profitable if you start to use the mining for something else and just creating the bitcoin and that's in my case is using the heat. So what I'm doing is I'm heating my house. My hot water and the hot tub completely with bitcoin miners. Um, which basically means that these miners they generate a lot of heat and because a computer any computer converts 100% of the energy you put in it actually comes out as heat. And as soon as I realized that um I could not stop and thinking about how can I reuse this heat and so how it technically works is you actually put the miners into oil you heat up the oil and then because you have it inside the liquid or you have the heat as a liquid you can then transport it throughout your house. You can convert it into water. And so that's basically this this um the technical way how it works and that then becomes the calculation of is this profitable which everybody is asking all the time becomes so much a different discussion than like these really big miners that for them. The profitability is purely the bitcoin that they mine.
07:06.10
Michael _ _Schnitzel
With the electricity for me I now generate 2 things. Yes I generate bitcoin but actually way more important is I generate heat and in case of let's say the water that I would have heated any way with electricity and the electrical cost that I have is 1 to 1 the same. From before where I had the regular water heater to now the bitcoin heater and because I want to shower anyway and so all the sides that are generated are now completely free like um, any sets that is generated through this mining system. Um. Do not cost me any additional electricity the cost because I've paid them already so that's the that's the big part and and I've been working on this now since two or three years and just for myself. Um, because I was wondering if it's possible or and I believed. It's possible and so I spent hours and hours in. Learning about immersion about different tubing systems and mining itself and all the different things and have put this on Twitter and people are super excited about this because people that realize that you can now for the same costs and they generate free sets they want to do this and so. What I'm working on now is actually creating as much content for people that want to do this themselves so that it's like open source videos built built and cyst or like in it in instructions on how to build the systems by yourself but also and.
08:17.70
ilm
2
08:35.77
Michael _ _Schnitzel
Thinking about how could we actually create kits or plug and play solutions that we can send to people's houses that they can plug into their house and also mine their house or heat their house with mining.
08:47.64
ilm
That's ah yeah, it's that's incredible think about um, as and I mentioned to you a about a month back being in Texas heat is not much of a concern but what we're looking for is cooling so I would love ah 1 day if you can figure out how to take that hot air you you. You you explain it to me ah in a dumb down manner. So I could somewhat explain it how it is technically possible to take that hot air and convert it to cold air. Basically just how like Ac systems do it. So if you can crack that one from a bitcoin mining perspective. Um I think the.
09:14.70
Michael _ _Schnitzel
Correct.
09:20.61
ilm
The state of Texas will be eating out of your palm.
09:23.92
Michael _ _Schnitzel
Ah, yeah, no, that's actually 1 of the next things I'm working on because funny enough in the airstream. We have a fridge and the fridge runs on propane and the propane can only generate heat so there is physical possibilities to convert the heat back into cold and so. I'm literally scouting ebay right now for like some of these frictions and try to find one and connected it to my bitcoin miners to in the end, not cool the whole house yet. But at least the beer and or some other ah beverage that we want to cool down and through bitcoin mining and just as a proof of concept. But of course with the very very end goal. To maybe cool complete full houses with bitcoin mining like.
10:02.41
ilm
That'd be amazing. Well, let's so let's take it back now from your heating your house and your hot tub and your water with bitcoin miners. Let's just talk through again. The side of things that I know the things I'm smart at which is into it's it's easy to keep track of because there's not many of those. And I know a lot of things I'm not very smart at and 1 of those many things is just more of the technical computers and like yeah just the simple things I mean frankly, it's where people are like I don't understand bitcoins therefore I won't use it. It's like dude I don't understand how most things work like you and I like were. We're thousands of miles away but yet we're seeing each other and talking in real-time I don't know how that works that blows my mind I I couldn't begin to tell you how I can see you right now. But I still use Zoom so or a phone or a picture out alcoholic camera works and that's nuts I couldn't explain it to you. So let's take those are things we're used to and I think a lot of yeah. Using something that you don't understand um you either have to you either have to has to be so normal that it's used that you don't even think that you don't understand it like you know people use cameras and phones and stuff all the time and most people don't understand how they work. It's just normal part of life so you're okay with that. But to begin using something that's abnormal. Or at least currently abnormal to be comfortable with utilizing it. It helps to understand at least at a base level what that thing is or how it works it sort of you know it? Ah, it pulls back the curtain on the the mystery of the what ifs.
11:32.28
Michael _ _Schnitzel
Yeah, yeah.
11:34.43
ilm
And ah brings in a lot of comfort. So if you want let's just talk. Let's talk a little bit now about like what is bitcoin. What's the computational side of things like these terms of mining and hash rate and nodes or like I mean in the 90 s like this is this is not something new like a peer-to-peer trustless permissionless. Money system is something that wasn't traded in 2017 or 2018 or even 10009 by Satoshi Nakamoto is something that people have been working on for for decades. Um, so just let's talk through those things like why and what and how and all that fun stuff.
12:09.40
Michael _ _Schnitzel
Yeah, now happy to do so yeah I think the most important thing as you just mentioned this satoshi the creator of bitcoin he didn't come up with all the technologies or the different things that we're using today in bitcoin what he did or what they did. Whoever that is and they combined existing tools very cleverly and added some things on top of it that solved some of the problems that these other tools had that they failed like you so like you correctly said since the very beginning of the internet. Or of any digital communication people have been wondering. How can we send money or how how can we can we transport value between 1 person and the other and that's actually how I ended up in bitcoin and we at the time in like 2011 all we talked about this digital scarcity. And and what this means is that Satoshi figured out a way. How I can send something to u dream without me using it anymore while the whole internet. Everything else about the internet up until their point was about copying something very simple so like content. Or a picture or music like Napster like all these technologies they all created something where in the past let's say you want to copy a bible. You need first you needed somebody that wrote it and a second time then people figured out how to print books and then they.
13:42.21
Michael _ _Schnitzel
But still there was physical labor involved in printing the the book and transporting it and then the internet came and said you know what there's a pdf I can send it to you. It's basically 0 physical cost for anybody and so it was all about transferring knowledge very fast and copying knowledge very fast and now. The problem is though with value and specifically if you want to have um, a stable amount of anything you want to ensure that if I send you something that that I cannot use it a second time that's called double spend that means that if I send you a specific amount of bitcoin. I cannot spend it anymore and the system bitcoin figured that out and I think that is called digital scarcity and interestingly Satoshi like there are references that that they say look this could actually be used for other things as well like it doesn't have to be only used for money. And but it obviously makes a lot of sense to use it for money because that's the thing that that where we store value in and we store value in money and so if you have a way to have digital scarcity and to use it for money and to transact and and that's. Basically the crazy invention that bitcoin is is digital to scarcity and everything around follows after that. Um, but yeah I think that's that's the really the part that in 2011 when I saw it the first time was like oh wow we have never seen this before.
15:09.37
Michael _ _Schnitzel
Um, and that's was the big invention from Satoshi.
15:12.10
ilm
Yeah, that's I was I was actually talking with someone earlier today and they mentioned they're just saying it's it's interesting. Someone was able to create a money itself through bitcoin. The thing is bitcoin itself I guess we we treat it as money and it is money. But it's based since it's not like someone went out and created a a currency in the way that we think about it. They created a a line of ah a line of code that allows for digital scarcity that can then can be transacted and utilized as a form of money. So it's not like they you know Satoshi did create money that is white papers about that. But it's not It's not We're not looking at money in the sense of how we view money in its sense of like you know like I I have actually right your front to me from a conversation earlier, a 50000000000000 ah, Dollar Zimbabwean note or you know us dollars we think of money as this as a currency as a piece of paper that's backed by something that's not what bitcoin is it is a means of digital scarcity that can be utilized as money. It could have other functions. But if you think of like. You know, important things in life money is very important. Um maybe more or less to you. Ah, ah, subjectively but objectively having a means of ah communicating storing and transferring value across space and time is really important and ah so that's ah yeah, say ah.
16:42.72
ilm
First primary base of what is something that could be utilized from this technology. So yeah's when I'm trying to communicate with people sort of some of the issues that were having trouble getting cracked through other cryptocurrencies now like the term cryptocurrencies has been hijacked. Um, or but really, we're talking about like just cryptography and currency so crypt crypto cryptographically ah backed money and ah that they used to be that's ah that's a pure thing and it's it's in a sense but it's been hijacked by everything else that comes along with the baggage of of cryptocurrency. But with with these I mean this is something that's been. Try to tackle for for over a decade before Satoshi came on the scene and one of the problems when I try to relate to people in my simple mind is like if I send you Michael an email I retain a copy of that email and then you have a copy of that email. So now we've duplicated this and bitcoin was somehow to make it able to make it where I send you that bitcoin. I no longer retain this this copy of code and you have it and not only that. But we're also not counting on this trusted third party or me individually or you individually to keep a safe ledger that the transaction took place but rather that transaction is then ah signaled to everyone else. In this ecosystem to keep a ledger um to verify what transaction took place that Jim sent this email to Michael and I could I could say no I never sent that email but everyone else received a signal to know that took place and y'all can verify it and basically the the greatest number of verifications wins.
18:19.20
ilm
And y'all can March on and assume that that that actually took place because you'll are able to verify that. That's very simply how I put it but ah like I guess let's keep pulling. Let's go keep pulling those strings. So um. Do you feel like so so Satoshi Nakamoto guess for those who are listening who don't know who that is or what in the world. We're talking about Satoshi Nakamoto is a person or people or entity. No one, no one knows and that's something you have to come to terms with is like we don't know who this is and don't you can't get hung up over that I mean frankly like I don't know who invented the wheel but I still use it all the time.
18:48.23
Michael _ _Schnitzel
Or fire. Yeah yeah.
18:51.68
ilm
And you know if the person who invented the wheel came and was able to prove like hey this is me I invented the wheel. You know we don't have a lot of appreciation. But if that person came and said hey I've thought about it and circle wheels have been great. But I really think that square wheels would be better. You know if they could really prove they created the wheel I think we'd all just like. Out of a sign of respect say all right? We'll hear you out. You know if I said I want square wheels or like dude beat it. But if he if if the wheel creator came out and said I like square wheels we say look I don't think it's going to work but we'll hear you out just out of a out of respect but they could do nothing to change wheels that are used into so into squares beyond like. Ah, instead of a circle beyond anything like more than you could or I could they'd actually actually have a convincing argument. So if this satoshi nakamoto person comes out as an individual that you like or dislike or institution that you like or dislike that doesn't actually mean that they have any more control or less control. Any other individual or group or entity. Um, over how bitcoin works moving forward and you have to be you have to come to terms that that's okay so with that said, so to Satoshi Nakamoto they wrote this white paper basically with el lotta allen or stand I guess Michael if you want to talk to us like. Sort of what was in that white paper. What made it important and any key pieces of that paper or just the initial like hey here's bitcoin here's what it is what made that special compared to the thousands of cryptocurrencies that exist now or even the things that we're trying to be created up to that point.
20:18.92
Michael _ _Schnitzel
Yeah, yeah, so the big thing that Satoshi Ogamoto came up with is the complete decentralization of the lecture before bitcoin. There were digital cache systems that always relied on a central entity. To actually confirm or deny a transaction. So that's basically a bank where I will send money to gym what I actually do is I go to my bank tell the bank please send money to gymm and because we both trust the bank and we trust that the bank has you can imagine this like an an excel spreadsheet. That says Michael has 1 bitcoin Jim has 0 and then I say Michael sends 1 bitcoin to Jim and then in the end it says Jim one bitcoin and Michael 1 big zero bitcoin and anytime we can go back to the bank and saying hey bank. How much bitcoin has Jim and then bank says Jim has 1 michael has 0 and because we both trust the bank. This is how we can transact and and people recreated this in digital ways and but we there was always this central entity and that's what Satoshi figured out a way how to not do this and how we did. This is basically first. He created a global lecture so instead of having he said instead of having a central entity that keeps this letter. Let's give everybody the lecture and that's one of the things that I think a lot of people don't understand this if you have a bitcoin note which is basically that excel spreadsheet.
21:53.39
Michael _ _Schnitzel
You have every single transaction that ever happened in bitcoin is in that lecture and the other interesting thing is it actually doesn't say Michael 0 chim one. It just has every single transaction in it. So the tally and the end that says how much bitcoin does. 1 specific person or address have is never actually stored. It's only every single transaction and so with that we basically have a way that I can confer I can verify and you can verify that um that you have 1 bitcoin and I have 0 bitcon.
22:31.73
ilm
Um, yeah I don't know how I would begin to even create that. Ah I took when I was in probably sophomore year of high school I I took a coding class and I was proud when I was able to make like a stick figure. Um.
22:46.96
Michael _ _Schnitzel
Yeah, and and.
22:48.87
ilm
So but yeah, when I when I think of me doing anything technology- wise I think of on the office when when they when creed wants to create a ah a blog so they actually just give them a ah ah web doc or a word document that you types on it's it's connected to nothing is just on you know Microsoft word. That would be me trying to make anything like this.
23:09.85
Michael _ _Schnitzel
And actually what what is funny enough like this is all peer-to-peer. So if you have these these spreadsheets or um, these bitcoin notdes as we call them that keep the lecture they all talk to through peer-to-peer meaning there's no central entity again. It's just every node connects to. 5 6 other nodes and because not not every node connects to everybody else and they just create a massive network of of nodes that are peer-to-peer connected and that technology again Satoshi did not invent this like Napster brought this already up like that's a technology that we knew way from before. From doing illegal things and where people figured out these peer-to-peer protocols and how these tools can find each other can communicate to each other can also handle like bad actors things like that. So. That's that's where the peer-to-peer and how this basically works is whenever you want to do a transaction or let's. Let's go back to the transaction I want to send one bitcoin to you? What I do is I transmit this transaction to let's say my other 7 nodes that are connected to me and they will transmit to all the other nodes and the other nodes and the other notes that at one point you can reasonably assume. That all the nodes have received this transaction at one point and the problem is though how can we assure that after I transmitted this transaction that I sent 1 bitcoin to Jim.
24:39.57
Michael _ _Schnitzel
How can we ensure that I not suddenly say later? Oh no, no, no by the way that was a mistake I now sent the bitcoin to Ruth and so that's the because you don't have a central entity now the bank would say no wait Michael you sent the bitcoin already dream. You don't have it anymore I'm sorry and. But if we don't have a central entity and we need some other way to ensure that you cannot change suddenly rewrite the past that I cannot go in there and saying oh by the way now I send 1 bitcoin somewhere else or my bitcoin is now suddenly at roof's place and things like that. And that's where the blocks come in and.
25:22.78
ilm
Um, see I was about to I was about to bring that up because there's there's these phrases that have been become gimmicky and that like I actually stay away from despite how much of my time both personally and vocationally involves bitcoin.
25:38.32
ilm
I avoid so much of the terminology that is so related to bitcoin yet is just mixed with other things. So one of those being cryptocurrency like I never say the word cryptocurrency or crypto just because it has like I'm a christian but I don't really talk about like religion that often because ah the connotations of religion has. Baggage when christianity is it's a religion. Um, but I don't throw around that term just because the baggage come along with it so like crypt cryptocurrency I don't use that term another one is blockchain. You know Blockchain is such a. Ah.
26:13.77
ilm
Buzzword and no one really knows what it means you have companies who are putting everything on the blockchain which can you talk about that like has anything that you've talked about thus far is any of this related to the blockchain like have you already spoken to what the blockchain is we just haven't used that word yet or is the blockchain something else.
26:30.13
Michael _ _Schnitzel
So The blockchain in its simplest form is basically a distributed database where which allows you to store data in a lot of different nodes or. Places or computers where together all these computers can agree. What Actually the history is and you cannot change the history.
27:01.70
ilm
So it's ah you mentioned earlier these excel spreadsheets that I can keep and you can keep and instead of having a bank keep so is the blockchain essentially all of those verified the grouping of verified excel spreadsheets in 1 spot. And then as and from I understand it basically as a new spreadsheet is created. We add that to a the block. It's a it's a chain of blocks is that remotely correct in a very dumb down manner. Yeah.
27:27.92
Michael _ _Schnitzel
Yeah, so yeah, so the problem with these distribution systems. We need to ensure that if I send you one bitcoin and I cannot suddenly a week later come back and saying like oh by the way. No no, actually that bitcoin is now with with person c let's say that's Ruth. Um, and the blockchain solves this with all the transactions that happen within 10 minutes so let's say I send you a bitcoin um that transaction Michael sends chamber 1 bitcoin is added to yeah what wait one's like.
28:00.40
ilm
Here. Let's let's let's make this from just being a hypothetical want't you go ahead and send me a bitcoin real quick. Ah so I carry on.
28:05.25
Michael _ _Schnitzel
I have a test net I can send you a thousand pick on if you want but that's and not don't have any value and no so but but yeah, what you do? So we take all the transactions that happen within 10 minutes so everybody else that also transacts we take all these transactions together. And yes, we put them on 1 spreadsheet, um, altogether and then we take a so-called hash of this spreadsheet so that's like a checksum we basically calculate and we say okay this spreadsheet has a checksum 7 now if 1 person would change. A tiny bit of information like let's say I would say I will send you a 2 bitcoin the checksum will change meaning that um the 7 changes into a 9 um, so and then what we do we create a new spreadsheet and we put the number 7 that was the checksum of the first spreadsheet we put it on top and we put the 7 in there. And then we gather all the other transactions of the next ten minutes we put them all in there and they have a checksum. Let's say 12 then I create a new spreadsheet and I put the 12 on top of it now and this goes on and on and on this happens every 10 minutes now if I come a week later and I say hey Jim. By the way the bit kind that I sent you I already sent them to Ruth over there. You can go back and say like no, no, no, no look here and this spreadsheet says Michael to Chim and then I say well no, no, no, it actually says my version says Michael to Ruth and then you can say well show me your checksum.
29:38.16
Michael _ _Schnitzel
And then I need I show you you show me 7 let's say my checksum is 9 and then we can look in the next block and then we see the checksum 7 in there and my checks from 9 is not in there. So the blockchain basically ensures that we can agree on a specific history and if ever anybody claims. Something in the past was different everything else needs to change so in order for me to change something in the past I not only need to change that single spreadsheet that entry I need to change every other spreadsheet or every other block that I also need to go and change. And that's impossible. That's just so much work that this would not be possible. Um, there is a chance though and we can go into that and that's where the miners come in but that's basically what the blocks ensure the blocks ensure that together we can agree on the history and what is interesting. And that's where maybe some people have heard oh you need to wait for six confirmations. It's actually easier for me to change something that just happened like 1 spreadsheet ago or 2 spreadsheets ago than changing something that happened a thousand spreadsheets ago so that's why sometimes you say hey. Let's wait a couple of confirmations or blocks and um to actually assume because what could have happened is that when I sent you that the initial transaction because there's a completely node like all these nodes that are loosely coupled with each other that need to all agree. What the next spreadsheet is.
31:11.67
Michael _ _Schnitzel
Maybe half of the nodes have not received my transaction yet and they actually in the spreadsheet that they generated my transaction is not in there so I need to wait a bit for the system to actually be able that I can trust it that the my transaction. That I did has been seen by every single node and has been added to the spreadsheets of every node.
31:34.61
ilm
Um, there's I want to take this a lot of ways. Let's while while we're I want to go back like 3 points ago right? quick you're talking about. We could. We could have a bank as the centralized party that we reference. For transactions and their database. So they're the they are the spreadsheet keeper. Um, why is why is having a decentralized these group of spreadsheets. Why is that better than um, a centralized party and why is that better in some instances maybe like I would argue and. And the case of bitcoin so money yet. It's not better for other things like if it's better. Why don't we put everything on a blockchain or everything on a decentralized ledger if if it's if it's better like you want talk to about that right? quick.
32:17.84
Michael _ _Schnitzel
Yes, yes, yeah, well basically these decentralized lectures are very slow, very compute intensive and not optimized at all and. So and that's actually one of the things that when I looked at the very first time in bitcoin we realized that you can do 3 to 4 transactions a second because you need to wait these blocks or these spreadsheets they have a specific amount of rows. So if you have more transactions. Just like the newest rows they have to wait for the next spreadsheet and or for the next block to get in. So it's a very slow process and very compute incentive like all these nodes. So every bitcoin node stores today around six hundred gigabytes of data and every node stores. Byte for byte the exact same data in all these hundred I think we we estimate we have like 200000 bitcoin nodes today. So there's 200000 bitcoin nodes that all store six hundred gigabytes of exactly the same data like if you tell this to any technology person that tries to make optimized fast systems. Like this is complete stupid like just store it once agree which of the one is the main one and then the all the all the other ones you can store it for something else. So these these centralized systems are very very very ineffect in. Ah um, inefficient. But they're very trusty.
33:49.17
Michael _ _Schnitzel
Because there's no single entity that can suddenly go in and saying oh by the way chim you didn't pay your taxes. So let's off this off this whole bitcoin that you have now half of them. You don't have access to or this transaction actually never happened because Jim you. We don't like you anymore. Um, and we have numerous and thousands of examples of this where with the current fiat system that relies on decentralized entities aka banks where suddenly people get kicked off and people suddenly have less money on them because there's a computer bug or things like that. So. It's inherently, really bad, but it's very efficient to have it centralized, but that's what we want with bitcoin the layer one and maybe we can go into the different layers a bit later but the layer one is inherently very very slow, but that's a good thing.
34:40.52
ilm
Yeah that's that's one of the biggest critiques of bitcoin. There's a lot of when we can get in some of those in a bit but but 1 of those being it's it's inefficient which I would agree with there's this there is a. And in anything in life. There's going to be tradeoffs and opportunity cost and a tradeoff with bitcoin and its decentralized manner is the efficiencies or lack thereof so other cryptocurrencies as mentioned earlier. There's thousands of these other things and could you know that's a lot of the sales points of these other cryptocurrencies is it's more efficient. It's. Can process more transactions or um, it's easier. It uses less computing power than bitcoin. Why is why is that not a worry the inefficiency versus the efficiency of these other cryptography cryptocurrencies.
35:28.99
Michael _ _Schnitzel
Because in order to really do it. Decentral. We can only do it this in in an if inefficient way like as soon as you want more efficiency you have to add, you will add some kind of trust into the system and trust means that. Individual people will be trusted by others and then these individual people suddenly have an incentive to play some games. Um like that's what we see with governments. Um, there's no government in the world that has not a corruption like if you are the person that decides who gets. Ah Driver's license how fast of course there is an incentivation automatically to say well if you pay me a little bit more I will just put you 1 1 1 1 like on on the staple of or ah staple of all the set of the driver's license. Ah um, applications I will just put you on top of it and then. Like yeah, you just give me give me a little bit of dinner or whatever you invite me to your boat or you so pay me a holy yacht like whatever it is. That's humans humans are inherently not fair because humans think about themselves again. This is all a good thing and the problem is if we do this. If. We let individual people decide about others. That's when these things come in and that's where bitcoin writes it into code lets machines which inherently are not unfair. They just execute the code. So if we write fair code and give these computers all the same code.
37:02.69
Michael _ _Schnitzel
We can create a system that is very slow but very fair.
37:07.67
ilm
Awesome. Yeah, it's perfect and obviously you mentioned earlier the layers and everything we can go there in a bit. Um, here's here's something you you earlier talked about how you do home mining with bitcoin. But since then you've used the word node a lot as a means of verifying transactions. Can you help me understand the difference between like a node like was like what is a node like running a node. What does that mean and what's the difference between a node and mining or like what takes place in running a node are the applications of that versus mining.
37:33.80
Michael _ _Schnitzel
Yes, yes. Yes, so as I said before we want the notes keep all these spreadsheets or these blocks and they basically synchronize themselves they store the transaction history if you want to know hey James how much bitcoin. Do you have or Michael how much do I have I need to go to a note that has the complete transaction history. But what I also said is we want to make sure that every 10 minutes a new spreadsheet is generated and now how do we do this in ah in a. In the internet where everything is in real-time where everything is super fast where we literally invent new fiber optics to send data as fast as possible between different continents. We need to find a way that something happens every 10 minutes and that's where the miners come in. So. Bitcoin has a way to enforce that the spreadsheet is onlyrinerated roughly every 10 minutes and important here is roughly. It's not exactly every 10 minutes and how he does that is that the checksum that I mentioned before the seven the nine and the 12.
38:50.76
Michael _ _Schnitzel
Bitcoin actually says or the network says the checksum let's say needs to be 5 of this specific block now if you take all the transactions in that spreadsheet and you generate the checksum There's let's say there comes a three out. And that means the pi bitcoin network says no no, no it needs to be a 5 now in order to change the tax sum to a 5 the only way is to add some random number bitcoin calls it nones number used once and this number you add to the spreadsheet at the end and you generate the checkso again. And then maybe let's say a 1 comes out so you change the number to something else and you generate it again and a 2 comes out and the interesting thing about these checks sometimes is you cannot predict what the or you cannot go back. Um, so you cannot say I have all these numbers and have a 5 tell me which number I need to add to generate the 5 the only way to do this is just to randomly test the 1 the 2 to 3 to 4 to 5 to 6 to 7 until you have to check some number 5 and what is really clever. Bitcoin has a way to predict that. All the computers in the world that are basically guessing this number that roughly every 10 minutes a block is found and the the act of trying to find these numbers is called mining. So basically when I do ah when I have a miner.
40:23.60
Michael _ _Schnitzel
At home. What this miner does it. It takes all the transactions in the last ten minutes it takes them together creates a block runs the checksum and now the checksum doesn't says 5 it actually says like the checksum is like 30 and characters long. So it's an extremely big number. But the bitcoin network says the checksome for our block in order to be valid needs to start with a specific amount of Zeros and I what I do then my minor just takes all the transactions in the block transnaster checksome and says oh it starts with of one so this is not a valid block. So I will add a nons again. This can be a random number and I just do it again and again and again at 1 point this thirty thirty two length number will start with a specific amount of Zeros and that means because the baker network says currently it needs to start with a specific amount of Zeros. I find a valid block and the really crazy thing is that the bitcoin network can predict based on how many computers or how many miners are there in the world. It can predict how hard or how many zeros at the beginning of this. And of this hash or this checksum needs to be to create it roughly every 10 minutes and that's how the bit network can ensure that we generate a spreadsheet every 10 minutes and not every 1 minute or 2 minutes or 5 minutes or
41:58.15
Michael _ _Schnitzel
Every hundred minutes but roughly every 10 minutes and that's another thing that Satoshi invented this difficulty which is basically says how many zeros that it has to be in front that's something that they generated that didn't really exist before.
42:15.13
ilm
That's ah in those another term that I hear and a lot of people here is ah like hash rate or hash power and that hash power is essentially the the guessing of those Zeros It's the computing power to do that. So ah is that correct. Okay.
42:20.00
Michael _ _Schnitzel
Yes. Correct Correct yes and the hands rate I don't know no, that's correct. Yes.
42:32.46
ilm
And remember I'm I'm playing a part of a stupid person here this in me really yeah, I'm a good actor aren't I no um, let's see so um, again a way I in my simplistic actor. Um, in my in my simplistic mind. how I how I explain this is um, especially like the difficulty adjustment you alluded to that briefly a moment ago. So how I explain this to people is if if it was just you here and I I wanted you to be able to guess a number in the next ten minutes I could say hey Michael I'm thinking a number of a number between 1 10000 and you could just start going one 2 3 4 and you could count to 10000 in the next 10 minutes so roughly I would say all right if it's just one person it'll take 10 minutes to guess one between 1 and 10000 but if Ruth came in here as well. Um, I would need to increase that number because suddenly y'all are both just shouting out numbers and I need to double or maybe triple the amount of the the between instead of 1 and 10000 I'm thinking of number between 1 and 20000 and then if all a sudden we have a room of 100 people who are just shouting out numbers as fast as they can. I suddenly need to make that a really big thing and harder to guess and that's ah, that's essentially what's happening happening with this hash power. It's the hash power that's being exerted the amount of voices and how fast these voices are screaming out numbers trying to guess and if I did this for a while I could probably have a go to pretty good pulse just like if.
44:04.90
ilm
If you have a weird hobby of ah ah, guessing how many gumballs or in a gumball machine eventually, you get to the point where you can just see a gumball machine and say like that 1 has 728 and you're probably gonna be pretty close because you do that a lot and that's what this ah the the. Bitcoin mining network what Satoshi created it's able to get a pretty solid idea. It's not going to be 10 minutes on the dot but man it can based off how many people are trying to guess there's so many people in the room right now are going be yelling out numbers. We need to make it this much more more or less difficult. Do you want to you want to look I think this is one of the coolest things about bitcoin itself. Is the ah difficulty adjustment. Um, do you want to tell us a bit more about that I have a I'll tell you my simple brain way of explaining it after you give us the better more articulate way of explaining it the actual technical way.
44:48.33
Michael _ _Schnitzel
And no, that's exactly correct. So what the bitcoin code does so again, there's no central entity that says the difficulty the next difficulty is that many zeroes in front of these for for the. For the checksum. It's the code that runs on every bitcoin node and every miner also has a node running that looks at every roughly two weeks bitcoin the code looks at how fast did these ah blocks come in. So if it's exactly 10 minutes it will say hey the currently difficulty is good. We. We keep this for another two weeks if the bitcoin if the blocks over the last two weeks came in a little bit too fast. Let's say 9 minutes and 50 seconds it can calculate how much harder it needs to make the difficulty. That's again, the amount of zeros upfront in order to make it exactly 10 seconds longer and that calculation I mean I can't explain you how exactly it works but that is the freaking part that it can based on the history can predict the future to say roughly. This is happening every 10 minutes and what is interesting now this of course this works really? Well if you have like block times of 9 minutes 50 seconds or 10 minutes 10 seconds like it's very very close but we actually had cases where suddenly sometimes a big amount of the bitcoin.
46:25.19
Michael _ _Schnitzel
Hash power. So that's basically all the how many computers altogether are working on guessing these hashes when they all drop off very fast like there was the china ban a couple of years ago and very fast and 30% of the comp total hash power fell off cliff like was offline. And we actually had blocks that took 20 to 30 minutes average rate. But the first difficulty adjustment realized this made the difficulty. Also again, 30 to 40% easier and from that point on we had again 10 minute blocks which is fascinating to see that it not only works in these small increments. But also these. Big jumps bitcoin basically for two weeks it was struggling a bit but after that it was all fine again and that's the crazy thing if you go to anybody in the world and you say you have a computer system and you lose 30% of the network from one day to the other no system will. Continuously work again like everybody will say oh we need to bring back the 30% but bitcoin is able to handle a 30% drop off the hash rate and it takes a couple of days and after a couple of days bitcoin just jogs along and creates every 10 minute blocks again and that's that's like yeah. And a thing that even today talking about is is fascinating. Give me goosebumps that we have a technology that can do this? yeah.
47:46.92
ilm
Yes I think that's one of the most incredible parts of it even just the concept of having that a difficulty adjustment built in which the moment you start pulling the thread of bitcoin at all that is a that's one of the first things you encounter of like oh it won't work because of this. Um I had someone actually on Twitter today I mentioned something about bitcoin and someone commented about ah about mining profitability or lack thereof and how are we going to overcome this but there's too many miners and bitcoin drops in value. No one will mine anymore and ah, that's where this difficulty adjustment is just incredible. Again, going back. Ah, you know if if it was just you in a room and suddenly you know like wow that guy is earning some easy money by guessing numbers I want to go do that too and suddenly the rooms flooded with people. Well if we're still only guessing like a smaller number that number is going to be guessed too quickly and we just threw off the entire system. So we have to increase and then if everyone leaves like ah this isn't very fun I could be I would be better off going back to my 9 to 5 job instead of guessing numbers I'm out of here. Well suddenly you're staying in room by yourself and if that number remains super high. Suddenly it's inefficient. That's able to adjust again every roughly two weeks so again my my simple brain illustration. Would be ah if the gold in California in ah eighteen forty Eight was able to see wow. There's a lot of people heading here from ah from the from the east um, it up to that point gold was being pulled out of the mountains at a certain cadence. So. There's a certain.
49:19.71
ilm
Inflation rate of new gold being introduced to the market if the gold was able to somehow forecast and see like oh my goodness. There's a bunch of wagons coming. It would be able to retreat deeper into the mountains itself. So when those people arrive they get out there. You know suddenly when I think of cold miners I think of a scraggly guy wearing a red long Johns. Um, so they all show up. Ah no offense to any gold miners out there. Um from the 1840 s um, but ah, that's my picture so these guys pull up in their wagons and they got their their pickaxes out and ah their pans and they're sifting gold that gold is suddenly. Hard to get to despite there being this flood of people. So the the amount of gold being pulled out is at the exact same rate as it was before this big arrival which again the reason that 1 reason that's really important is to monitor the flood of new gold hitting the market and that's going to encourage and or discourage.
50:05.40
Michael _ _Schnitzel
Correct.
50:17.15
ilm
How many people are actually working on this versus other things that can and should be worked on. So if you got out there and it's like man digging for gold stinks. That's hard work and it's not worth it. I'm going to go I mean even it's maybe playing this illustration out too far but a lot of the companies that are still around today from the Gold Rush Era we're not companies actually based around gold mining itself but in peripheral exposures for instance, like Levi Strauss they created genes um out there to help people like have a good rugged gene while digging for gold same thing with ah ah garadelli good I think it's giadelli is ah a chocolate company. They were. They were a grocery store first and then they became ah a chocolateteer in California a lot of companies that are around today were they got there was like dang this thing this works stinks I can go sell chocolate instead and that's where bitcoin it comes in It's like dude that guy is making a fortune doing this. I'm going to get into it and suddenly it's really tough because everyone wants in and all sudden. It's not profitably more because so many people are trying it that all right I'm going to go and spend my time doing something else that benefits society and is not as hard for me and I can get rewarded and that's again going back with this terrible Monologue I sorry to drag all through this. But.
51:18.25
Michael _ _Schnitzel
Yeah.
51:31.44
ilm
Again, the the comment that was made to me prior today and that I get regularly and something I wrestled with at first before I fully understood mining and hash rate and difficulty adjustment is this whole thing about miners and like what happens when suddenly the reward is small but yet it cost a fortune. And thing is if if the the reward of bitcoin. It's cut in half roughly every every 4 years if we look at this 10 minute block and all that fun stuff. We know they every roughly four years the reward for mining a bitcoin is cut in half and that's going to happen next April April of 24 and if that if that happens. Um, suddenly the the benefit of mining a block is cut in half. So these people are out there mining bitcoin and not like Michael who's doing it and they're just that's a peripheral benefit besides mining or heating his house and water. But as a pure business expense. What happens to those companies. You know that's a danger well then because of this difficulty adjustment. It will just simply make it where people less people are are incentivized to mine if you don't have the energy efficiencies to mine bitcoin. Well you'll you'll stop. It makes sense to use that energy on something else instead to go make chocolate or make blue jeans. And the people who are able to do it well will continue doing so and this difficult adjustment will be able to account for all of these things so it just continues to happen at a 10 minute rate roughly and ah the people who stay in are are benefit properly and those who don't well, it's I mean it's it's fair economics in a very pure sense.
53:08.49
ilm
If you want to waste money on it if everyone decides we're going to stay out here and keep wasting money just because I mean technically we could do that but that's where logic just falls apart. It'd be cheaper. That's where it's it's interesting to think about like it would be cheaper to not try to mine bitcoin but instead just to buy it. Um, yeah, it's it's pretty incredible. The. Motivating factors. It comes along with with this again, it's not just money It's not just computing it's it's energy it's all of these things. Um, yeah, let me let me ask you this Michael so I guess while we're on things that concern people other concerns that come up regularly is like. Ai or super super computers or hacks can you talk to us about those things like you mentioned you you almost wouldn't here earlier and I'm glad you didn't quite because ah I want to get I feel like we've done it I think have we hit everything from a base level like what is bitcoin or anything else. You feel like would be good to share.
53:57.83
Michael _ _Schnitzel
So the only thing we need to talk about is the block reward and that part I think we don't have done but then but then we covered bitcoin as a whole. So yeah, so so one of the things that.
54:07.77
ilm
What is bitcoin we did it. Ah.
54:12.62
Michael _ _Schnitzel
As I explained like there's the hundred thousands of computers all over the world that try to guess this number this hash to find a block to then why we need to give these computers an incentivation to do so and Tooshi figured out two ways to do this one of them is to actually. Distribute the bitcoin at the very beginning so the very beginning of the on the day one there were 0 bitcoin in the whole world and what happened is that every block that a miner found. They got 50 bitcoin from zero so that was how bitcoin was created and. And then every 4 years like you say this 50 actually reduced so it was twenty five then a half of this half of these happens this. That's why we call it a haling and but the but the miners obviously have an incentivation to actually mine now because they get 50 bitcoin now at the beginning bitcoin wasn't a lot worth but that's why it is happening so the idea or the game theory behind this is having is that as bitcoin grows in value. The miners get less and less in terms of bitcoin value. But because the bitcoin is worth more and more it actually starts to even out and at one point though. All the bitcoin is going to be distributed so in the year twenty one forty we roughly have 21000000 and that's maybe 1 thing we have to talk about about the scarcity again. But basically at that point there will be no more bitcoin distributed all the bitcoin will be will be mined.
55:36.49
ilm
I'm glad you're bringing this up I remember when I first realized that like this is something I wrestled on for about 2 hours and then I was smart enough to think there's no end. The first person who's thought of this as a concern and there's tons of resources. So yeah, their whole thing of like okay there's only so many bitcoin. What happens when they're all mind. Why would anyone else? Why would anyone continue to mine and verify this network. So why would someone keep doing that after all the bitcoin's been distributed that is quote unquote the only ah incentivizer to to mine. So I apologize for cutting you off, but I'm so glad you brought this up.
56:08.39
Michael _ _Schnitzel
Yeah, you know that's good like I said so in bitcoin every block has a specific size. So that means a block can have a specific amount of transactions in it now at the very beginning when I started with bitcoin like. Every block was almost empty because not a lot of people transacted in it. But today now since a couple of months we actually have more transactions than block space. So more transactions every 10 minutes are are generated by the people that use bitcoin then have space in these blocks. Now the miner somehow has to choose who to put into the block because let's say there is 50000 transactions and you only have 5000 slots and who do you put in and that's where the transaction fee comes so me as a person if I actually send you a bitcoin. I don't send you a whole bitcoin. Maybe I send you and or in the transaction I put in 1 bitcoin and let's say 10000 sets and which is a little bit so that's like 0.0 1 bitcoin and.
57:13.36
ilm
Yeah, just ah since this is the intro. What is bitcoin a sat or Satoshi named after Satoshi Nakamoto is a is one one hundred millionth of a bitcoin so you don't have to buy a full bitcoin you can buy again. It can be divisible up to one one hundred Millionth there's no reason to say the code couldn't be changed to make it were. We have even smaller fractions if bitcoin gets to a place that we need ah even further divisibility. But that's it. That's a sad or Satoshi sorry keep going.
57:39.15
Michael _ _Schnitzel
Yeah, correct, no no, that's okay, so yeah, so um, let's maybe keep let's keep it a bitcoin so I want to send you a bitcoin and what I do is I actually send you 1 bitcoin but 0.1 bitcoin I say hey this is for the miners and. The miners basically look at all these 50000 transactions that are currently exist. They look at which have the highest transaction fee because they obviously are interested to make the most money it wouldn't make any sense to add a transaction in there that has 0 transactions or very small one so they're incentivized to mine the ones that have higher transaction fees earlier. So they will put them into the next block faster and so that's the way for me to signal to the network. How important is to this transaction if I just want to send you a bitcoin and saying hey here's a bitcoin I don't really care when it arrives I can put a very low fee. If we are literally standing next to our house and I want to go into the house because I just bought a house from you and I need to pay you I will probably put a high transaction fee in it and the game theory says that oft twenty one 40 and already today the miners will make more ah more money or value through these transaction fees. And basically after 21 forty we only will have the transaction fees and obviously the idea is that at that point bitcoin is so valuable and some people say it will take over all of the currencies and all other value in the world that we stored that even if we only have a little bit transaction fees.
59:07.90
Michael _ _Schnitzel
It will still pay for all the energy and the cost of all these miners together and and so there's no risk or really worry about this because it's all part of this big plan that bitcoin will take over the value of the world. So.
59:24.48
ilm
That's a fantastic segue away from a question I was going to ask but into another one. So if if I let say it happens Twenty one forty suddenly the transaction fees are so high those transaction fees are coming from. From you and me like if we're if we have to use bitcoin to transact and suddenly these transactions or fees are so high to make sure that we're actually able to pay for things. Why would I keep using bitcoin if it cost me much to use a currency is there any solution to that you mentioned this earlier with layer two so up to us about that.
59:52.82
Michael _ _Schnitzel
Yes, yeah, so actually let's let's start with outside of um of like bitcoin itself any systems that we're using today is always built on top of layers. So. Let's say if you want to fly from from the East Coast to the west coast you have an plane that flies directly between these 2 destinations but they don't go that often. What they do is they take together a lot of people put them in a tube and fly them. But then you maybe don't live right next to the next to the airport you have like a bus system or a car and things like that. So what we're doing is we're starting to do things in layers where you have very big transportation systems that only go from. Like every couple of hours like the plane while you have smaller systems like a bus that go much off much more often that can do the fine distribution and this system that is something that humans figured out and we also know for example in computers like as we're talking with each other. We're talking through the tcp ip system. And this actually has 4 different layers where every every single audio file that I send you that you hear go through all these layers and each layer is responsible for each specific part and also they start to chunk these different things so layering stuff anything.
01:01:24.54
Michael _ _Schnitzel
Is is a normal thesis thing in nature and humans and and whatever and so bitcoin does exactly the same so bitcoin has the layer one which is what we talked about so far is the system that can do a transaction every 10 minutes but is completely trustless meaning you don't have to trust. Anybody at all now layer 2 comes in which is called today the most known layer 2 system is called lightning and basically people explain it always like in a bar tap. So if you go to a bar and every couple of days sending them money every single time. And or maybe using your credit card every single time that you walk up to the bar and you buy a beverage and you walk away swiping the card doesn't really make a lot of sense. So what do you do instead? is you give your card to the bartender and saying I want to open a tap and then. You consume all all the badages you want in the end and um and at the end of the day or of the night or maybe over multiple days if you are a really good friend of the bartender and you trust them that they're not going to run okay with your credit card. And fun fact that actually happens where I live like we you just have like a running tab over multiple months at the restaurant because you know them so well and um you at 1 point you tally up and so and but that only works because there's trust there's trust between the bartender that you not suddenly move away and you never close your tab.
01:02:34.76
ilm
Multiple months at the restaurants because you know this so well. Wow, that's cool.
01:02:52.80
Michael _ _Schnitzel
And there's trust with the bartender from you that the bartender doesn't run away if your credit card and just spends it and that's where layer 2 comes in so I can basically open up a tab with let's say my restaurant and saying hey restaurant I want to open up a lightning channel between me and the restaurant. And through that one I can then transact all the time without ever touching the layer one. So we basically trust each other we send each other bitcoins back and forth and only when we say okay now we don't trust each other anymore or I want to use the bitcoin that I have. Locked into that channel because I have to put in some bitcoin into that channel and if I want to use it something else I can close it and meaning I can undo these things and the opening and the closing of these channels this happens on layer one. So for that. We need to do one transaction. And that takes a bit of time that we have to wait for and that cancels transaction fees but every other transaction between me and the power um or the bartender is completely free because it's trusted between now what is really nice about lightning is this can go over multiple hops. So let's say. You trim also go to the same bar that I always go now I need to send you some money I don't know we I laed your ioio lawn and I say hey you gave me $10 for this now instead of opening a lightning channel with me directly which again would take 10 minutes and you have to wait and then the.
01:04:24.84
Michael _ _Schnitzel
The bitcoin is locked into that channels. You can go to the bar and saying hey bar by the way. Can you send Michael Ten ten dollars or 10 bitcoin or whatever it is so the light. So the the bar now suddenly becomes an intermediate between us 2 and that's how. Internet works. That's how routing works. That's how everything that we do in terms of communication works that you don't always actually talk with each other directly you talk through intermediaries and the lightning network uses that system to ensure that I actually only need to open a couple of channels with. Maybe the things that I interact with all the time but because they are then connected again in the background I can send now money in lightning speed. That's where the idea lightning comes from it's in real time and between people without needing to wait for these 10 minute block times. And every single time that they're going to be slow and as you correctly say got to be very expensive because I believe at one point these layer 1 transactions. They're only going to happen if you do really really big transactions like if you buy a house or. Ah, company buys one another. That's when you go to layer one because again, there's trustless down there and for the daily stuff of just using systems. We're going to go layer 2 or maybe even layer 3 however, these look like we don't know yet, there's some ideas of layer 3 on top of layer 2.
01:05:52.20
Michael _ _Schnitzel
But that's where we like daily transactions are going to happen. They're going to be instant. They're going to be almost completely free. So like these lighting transactions. Sometimes you pay like even less than a set so that's like less than a hundred millionth of a bitcoin so in dollars today. That's a couple of cents um of costs to send and these transactions and around and they're instant or like almost instant fast. So so that's where we see the layer 2 really happening and to go back to the history. That's the part that I did not realize in 2011 when I looked at bitcoin 2000 and glamin I said like this is way too slow but I did not realize that people will come up with layer twos and layer threes and so yeah I missed it that at that point but I learned it later on.
01:06:40.43
ilm
Yeah that's ah, that's a big thing of of other cryptocurrencies is the inefficiency from a that we spoke to earlier the inefficiency of time and power and everything that that comes with bitcoin and again that that comes with the tradeoff of security. But then ah the. The ability to build on top of that to create quicker less ah more cost-ef efficient. All these things I do want to if you could just real briefly I want to remove any sense of fear or or queasiness. Ah, this lightning thing because when when we when you speak to this and not you but when it's spoken of of like oh you set up these channels and blah blah blah like that can seem scary like I don't know what in the world like so I have to go to if I want to send money to what we set up a channel. How do I do that like I don't even I reallyly know how to get in my email like how do I set up a lightning channel like. Does that mean like if I go like I have walled of Satoshi on my phone. It's a it's a bitcoin wallet and I could send you over the lightning network I can send you bitcoin instantaneously that takes place and I didn't have to set up a channel with you. So did the channel get set up for me automatically is that is that routing through someone else's channel like. How does that work.
01:07:54.54
Michael _ _Schnitzel
Yeah that's really the part that I see a lot of this is being abstracted or will be abstracted completely like if. You remember like in the past when we had to go into the internet like you had to take your phone and disconnect the cable and connect to your computer and you had to click a button and it took a couple of seconds and you made all these beautiful sounds that we all missed today and and then you were in the internet and they could use your phone and like and now literally my watch is in the internet all the time. Like that's from like where we went from and that's where we're going and I think we're still in analog times in like bitcoin or lightning and and so yes today if you want to use lightning you have to do channel management and if you want to really do it by yourself. So meaning if you want to have your own lightning node. You have to find peers you have to open channels to them. You have to make sure that like the channels are balanced and all that stuff there are today now solutions where companies take this over completely for you. The problem is they actually then have access to your bitcoin. So you basically store it with them now. They don't have an incentivation to run away with the bitcoin but it could happen and we've seen these exchanges and all these other. Oh just trust me I will keep your bitcoin safe type of company's people eventually. They're all going to again like like we said before about the driver's license. They have an incentivation to actually start.
01:09:12.79
ilm
Ah.
01:09:21.20
Michael _ _Schnitzel
Do some shady stuff and and so but what I believe is in the Future. We're going to have lightning software that will do the channel management completely autonomously where you just have your note or your lightning note it can be on your phone. It can be at home wherever it is. And all these channel management is going to be completely automated where you just send money between different entities and you don't worry about this anymore like in the past where we worried about am I now using the phone or the internet and today. The internet is everywhere all the time active and we don't even realize it anymore.
01:09:59.61
ilm
Yup, that's exactly there. That's that's so much of the demystifying. This is a few things of recognition one is the recognition of how much we utilize today that we don't really understand that it's it's we take for granted and it it just works. And I know bitcoin at being a new thing and there's fancy words that aren't used in normal vocabulary so it can seem mysterious but the moment we come to come to realize like well that's that's how most things work and it will become all the more normalized um it it demystifies and again it makes it but more.
01:10:34.10
ilm
Available and and you know ah relatable from a normal sense. You know like yeah, whatever thirty years ago the internet forty years ago like I dude I don't even know what you're talking about like how would this work. How do I like how do you get online? What is an email like I love this video from like. Was they like the morning show or something where they're trying to figure out like what is the internet and what's ah they're talking about that the at sign like oh that little thing with a circle around it I think it says about it like that doesn't make a sense like what is it? What's it. What's the internet. Anyways, it's like that's where we are with bitcoin like what is what is a bitcoin anyways. And there can so there can it can seem daunting and again daunting can also equate to unnecessary but but so much of that daunting and unnecessary is built around unfamiliarity and if we can just start removing that sense of unfamiliarity and even that sense of having to understand everything. Just not I'm not saying blindly trust and just fully accept you have to know anything but like you know there's there's there levels of like I don't know how most things work and I'm okay with that like I don't know how to toilet works I can't if my toilet breaks I can't fix it. It's okay, I'm so can use it and that's okay and there's certain things I want know more or less about depending on like how depend up it's. It working and trust it takes and I think that's where different people are can come to terms of like I need to know all this or like I don't need to know that much as long as I know it works and other people know it. So um here my I guess along with that that that lack of trust and the fears could we just spend a moment talking through these.
01:12:10.98
ilm
These last these these things that tend to trip people up. Um, some of them may be valid. Some of them may be completely irrelevant from what But what if X happens what about supercomputers or what if what if I don't know what if bitcoin gets hacked like what if what if someone. I've heard I have a friend who lost his wallet and he would be rich and blah blah Blah Can you talked about like these what ifs.
01:12:33.45
Michael _ _Schnitzel
Yeah, yeah, yeah, there's definitely the question of like yeah, what are what are possible issues that could happen to bitcoin that it. It's going to 0 that's basically what but but what what we say if we say it's going to 0 that something breaks within bitcoin that this system that I just described somehow fails in some way and 1 of them. Yes is that people talk about supercomputers so and or quantum computers basically and so. In this calculation that that we talked about to figure out the hash where we have to guess all these numbers and or where you said like shouting into the room and a quantum computer can this can do this much faster and or. We believe quantum computers will be able to do this much faster based on what we currently see of a quantum computer doing and if we say much faster we know we don't mean 2 times as fast or 3 times we mean like a million times faster. So the worry is that if somebody figures out a quantum computer. They will have more hash rate than everybody else and one of the problems is if you own all the hash rate. So meaning you can create every entry in a Google spreadsheet you can basically do games that you can like.
01:13:58.49
Michael _ _Schnitzel
So or you can and publish a transaction and later on you can say oh no actually I never published that one but you already bought a house with that transaction and stuff like that. So if I'm the sole person that has all the hash right? or if a company or and and some kind of entity has this. That entity can then start to play games with the network. That's the worry about quantum computers. There is two things we have to understand first of all quantum computers are very far away today. Quantum computers are literally struggling with calculating one plus one and that's literally like that's that's a problem that where we are.
01:14:33.20
ilm
I Want to take this moment to just state at this point in time I am I'm smarter than a quantum computer. So take that.
01:14:35.50
Michael _ _Schnitzel
So we're.
01:14:40.90
Michael _ _Schnitzel
You are yes ah and and the other thing is there's only very few in the world to do this? Um, So so there is a risk but we believe that it will take quite a long time and it's. And that means the network has enough time to adapt and adapting means that we could change the hashing Mechanism. So The hashing mechanism that we currently use is called to shard to 56 You don't have to know what it means but it's just that. That's the way of that we're Using. And bitcoin the network could agree on using tash shard to 56 Quantum safe or something or we create another one and we could all agree as a bitcoin network that we all upgrade our nodes and to use this new standard and so that's one of the things. The other thing is why of course. The faster. The bitcoin grows and the more the more that bitcoin is actually adopted by all these big companies and some of them already using it today. Why would they interested in actually breaking bitcoin because they literally would like if you go back to your gold. They would literally. Throw their gold from their ships that they just mined so hard like it would not make any sense if bitcoin is really used globally by all these different companies and people. Why would you attack bitcoin like it doesn't make any sense because bitcoin then will be all worthless. Everybody is going to go back to I don't know what.
01:16:10.91
Michael _ _Schnitzel
Trading maybe Salt or who who whatever we're going to use at that point and and so that's the other thing is like yes there is a technical risk but we always have to understand that the game theory says that a company with such amount of power they better just mine and behave in the system then.
01:16:11.44
ilm
And whatever we want to use at that point.
01:16:29.92
Michael _ _Schnitzel
Trying to destroy a coin.
01:16:31.30
ilm
Do you outside of Quantum computing is there anything else you feel that or anything else that you hear as being like the big what if or that you think would be a ah what? if or that that that's scary with bitcoin.
01:16:49.21
Michael _ _Schnitzel
I think there is 1 thing that is still scary to me and that's that there is a bark in the software that we haven't found yet. But I also have to say of all the software in the world that runs. Probably bitcoin is one of the software that has seen the most scrutiny of most people of most programmers of the most intelligent people in the world they have looked at this code probably more than the code that flies your airplane that drives your car. That literally does a surgery robot like bitcoin is now so widely used by so many companies that so many people had an incentivation to find a buck in there and that if it exists it would have been found but what we have to understand is also we constantly. Modify bitcoin. We add new features to it and there are things that are not complete box that we say oh now bitcoin is broken but there are cases and they have been some in the recent months where people start to use bitcoin on it like but in a way that nobody else intentioned and. Not have to go into them. But I mean that's like where the whole ordinals and inscriptions comes from there's that's a technology that we we added a feature to bitcoin and somebody figured out another way to use it where nobody else thought and so we have to be very careful that as bitcoin is growing that we're not um.
01:18:25.00
Michael _ _Schnitzel
Blindly adding code or new functionality into this but that I also have to say is like of all the open source stuff that I've ever worked with bitcoin is probably the hardest the slowest the most scrutinized way if you want to even change 1 line of code in bitcoin. There's so many people looking at this There's so many tests around like no other software that I've ever seen in my life. So I really think that the chance that this happens is very very small but there is a tiny bit of chance. But I believe that chance is actually less than. Us finding a bug in an airplane or things like that. So putting it relatively to other things that could happen to our lives I think it's actually less and so therefore I've I sleep pretty well and about all of these but there is a tiny chance.
01:19:17.81
ilm
It's something. The last thing I talked through is that like ah the as bitcoin grows the safety of it in a lot of senses increases as well. So when bitcoin was young and not widely distributed from a hash rate or a node system. And easier to manipulate the system. But as the hash power increases and the people running nodes increase and people verifying these transactions. Um it as a system and the the more I scrutinizing it. It itself is becoming strengthened um in that that's similar to the the. What I believe as Preston I talked about a few weeks back was the the value of bitcoin is as the value of bitcoin increases unlike most assets you know you get a higher P ratio. It becomes more and more risky because it's It's seemingly overvalued what meanwhile bitcoin as it becomes more. Increases in purchasing power. There's a place of it becoming in a sense a safer asset because the adoption and the ah ah the market cap of taking over other things just the probability of overtaking other things become even further adopted just increases. So.
01:20:27.16
Michael _ _Schnitzel
So correct.
01:20:30.60
ilm
That's where time and ah, ah, the adoption rate is is doing the antithesis of so many things out there is like oh if we have more people scrutinizing this or adopting it or buying it. It's it's poking holes in all the time. Meanwhile this thing is just being more and more built up and and secured and valuable that so I was writing an article just a bit ago. Um before this and the question was about price of bitcoin if it's safe now because it just went up by like 25% in the last few days and it's in my one of the responses. Who who knows what's going to happen short term as price but theoretically as again I just mentioned as we see an increase in these things like it should become a safer asset a safer code a safer thing in general. Um, because of this these people around it. Um.
01:21:18.85
Michael _ _Schnitzel
Correct yeah and and analogy I've heard about that is like if you want to like? let's say you have a hotel and you go to the hotel and you burn down the hotel like that's that's obviously bad for all the people. But if everybody has a room in that hotel. Suddenly.
01:21:21.38
ilm
Yeah, it's it's it's It's pretty amazing.
01:21:38.81
Michael _ _Schnitzel
Everybody starts to protect the hotel like if you if you literally also burn down your own room and the shelter that you have and in that single hotel like nobody has an incentivation anymore. People are incentivized to work together to help each other to keep the hotel alive and now of course this. It's a bit weird and and into the into bitcoin. But that's exactly what's happening and if everybody starts to use bitcoin nobody has an incentivation anymore to hurt it and everybody suddenly is very incentivized to make it better to improve it and that's basically the thinking of open source. That's the whole reason that open source exists in coding. And and I think that's what's so hard for so many people to understand is that today we don't have a single money that everybody rallies behind we have all these different currencies and they all have incentivations to hurt each other and things like that. But if you have a global standard where everybody agrees up on. Suddenly the whole world will be a better place because we're all going to be incentivized, um on of working together because if 1 person tries to hurt everybody. They hurt themselves and that's what bitcoin will do.
01:22:48.83
ilm
Yeah, that's where I mean theoretically if you have some maniacal person who wants to burn down even their own room. They don't care that that would be scary but that's where ah, um, with bitcoin as it. It's not just as it's not just a room that requires a match.
01:23:00.50
Michael _ _Schnitzel
Oh yeah.
01:23:01.95
ilm
Now it takes a lot of resources. So suddenly you have to have a maniacal person who has access to an insane amount of resources and is able to manipulate those in a very particular manner where it just becomes the the statistical probability of this taking place is miniscule and not worthwhile. So.
01:23:15.30
Michael _ _Schnitzel
Correct. Yep.
01:23:17.66
ilm
Yeah, it's a self and you know enforcing mechanism. Well Michael I finally understand bitcoin. Um, ah.
01:23:24.35
Michael _ _Schnitzel
Ah, and by the way this is maybe 5 % of all of it. So ah, it's big. The rabbit hole is big but like you say well you don't have to understand everything I don't understand everything I have never read the bitcoin code from top to bottom. But I'm still able to explain it and I think that's really the the part like you're saying is that I feel like it's really great that you can go really deep in bitcoin and understanding the basics and I would say what we talked about now are the basics I think that's really good. Um, but. There is so much more to explore and it's an endless amount of rabbit hole I started again two years ago roughly and I feel like yeah like I said I've maybe found ten or fifteen percent and there's also so much more to come like so many people are working and improving bitcoin every single day and that's the exciting part that we can now be part of this because. If you want. You can be. You can go out and change this thing still today I think in a couple of years it will be impossible to actually move it around but that's a good thing again. We want slow systems but that's the super exciting part that we can now build the future of money for the world. Um, and yeah I encourage everybody to to learn specifically podcasts are a great resource to learn There's so many and things out there but there is websites. There is books there is endless amount of information to learn about all of this.
01:24:47.79
ilm
Awesome! Well thanks Michael is a handoff is there anywhere that anyone anyone wants to reach out to you or learn more about you or anything you think that' would be important for them to learn. But ah, what would you have them check out.
01:24:58.62
Michael _ _Schnitzel
So so you mostly find me on Twitter under the name schnitz all and so yes, that's the that's the austrian and speciality and I'm not from Austria but I still like schnitzl so. And maybe for the next podcast we can look at the history of that name. But and yes I'm on Twitter and there's also a link to naster over there and and pretty much on every other social media thingy. You will find me under the name of schnitzl I'm trying to whenever a new one comes pops out and go there and try to claim it. Um, but yeah reach out and my Dms are open on Twitter reach out if you have any questions I talk right now a lot about the home mining. But I'm I I really like to explain people things. So yeah I'm happy to have meetings with people to explain them the stuff because. I don't know a lot about other things and I love to learn new things. So if I can tell somebody else about bitcoin and they can get a deeper and a better understanding of it. This is what what brings me joy and so yeah I reach out if you have any questions I'm happy to help.
01:26:03.23
ilm
Perfect and definitely off to have you back on once you've managed to scale the heating system and certainly once you figure out how to you've cracked the nut on the cooling system. We'll bring you on. Ah we run will run a trial at my house. Awesome! Thanks! Michael.
01:26:14.41
Michael _ _Schnitzel
All right? That's good. Let's do that. Thank you.
