Has Bitcoin’s Mining ecosystem become centralised? What can be done about it? Bitcoin Mechanic from Ocean joins me to talk:

• Hashers vs Miners
• Different pool payout methods
• Stratum v2
• Block withholding attacks
• What Ocean is doing about it
• Fees
• Lightning payouts

Links:

• X: @GrassFedBitcoin
• Site: ocean.xyz/event
• X: @ocean_mining
• Article: Are Mining Pools Becoming a Problem? 

Sponsors:

• Swan.com (code LIVERA)
• CoinKite.com (code LIVERA)
• Mempool.space

Stephan Livera links:

• Follow me on X @stephanlivera
• Subscribe to the podcast

Podcast Transcript:

Stephan (00:00.836)
Bitcoin Mechanic, welcome to the show.

Bitcoin Mechanic (00:03.039)
Hi Stephan, how are you doing?

Stephan (00:05.268)
Yeah, doing well. I’m excited to chat about what you’re doing. I know it’s a big new thing coming in the world of Bitcoin mining. And I know obviously you did a recent post for Bitcoin magazine. So the links of that obviously will be in the show notes. Listen, you can go and check it out. But let’s talk a little bit about it. I think it would be good to start with some of your critiques of the world of Bitcoin mining today. What would you say is your high level critique of Bitcoin mining today?

Bitcoin Mechanic (00:35.062)
So I think the main way I would characterize it is that Bitcoin mining involves a whole bunch of things that aren’t just hashing. And increasingly people are forgetting about the other roles they play. And they’re referring to things as being Bitcoin mining that are not really entirely Bitcoin mining. They’re just hashing. Right. And if you’re hashing, my contention is that if you’re hashing blocks constructed by someone else with whatever soft fork.

version bit flips, you know, to activate whatever’s going on or censoring whatever transaction, you know, is or isn’t in a block template or whatever. If you’re just hashing on behalf of someone else doing that, they’re a solo miner and they’re paying you to hash for them. And if it’s an FPPS payout system, even worse, you don’t even care if any blocks get found or not. And whether you get your cut of the transaction fee revenue kind of, you know, is questionable and it’s very difficult to verify.

Stephan (01:25.112)
Okay, yeah.

Stephan (01:33.691)
Yeah.

Bitcoin Mechanic (01:33.846)
Basically, everyone’s like, there’s this dangerous illusion around where we think, as long as the hash rate is all over the planet or not too concentrated in any one particular place, mining is decentralized, but it’s not that’s decentralized hashing that’s not decentralized mining the different things. So I think it’s just to kind of redefine these terms a little bit. That would be my intention.

Stephan (01:51.228)
Okay, yeah.

Stephan (01:55.392)
Yeah. So let’s explain that a little bit because there’ll be some new listeners and let’s try to make sure everybody can follow along. So most people who’ve maybe at least read some introductory material or listen to an introductory podcast on Bitcoin mining, they might have the concept of, okay, there’s Bitcoin mining people, and then there’s the pools. And there’s this conception that you as a miner are contributing or you point your hash rate towards a particular pool.

And so, you know, there’s maybe six or so dominant Bitcoin mining pools and a sort of a long tail of, you know, less dominant mining pools. And so do you want to just explain some of these different, uh, terms in terms of like, why, why is it in your view, is it more appropriate to call that mining person a hasher and not a miner? Let’s put it that way.

Bitcoin Mechanic (02:49.518)
Sure. So real naive early day Bitcoin, you’re talking pre pools or anything like that. The process of mining Bitcoin means you go and you, you find whatever block it is you want to build on top of. So block 558 or whatever, you go and find it. You just, you verify it. You, you decide that everything in it’s acceptable and you’re running your own node, so you’ve verified that everything leading up to that was acceptable. You don’t know of any new blocks. So you start constructing a template. This is, uh, you know,

before the block gets solved, you construct a block template. So that includes a pointer to the previous block. It includes any new transactions floating around in the network that you might want to be in that block, including your own or whatever. You’ll usually choose the most lucrative ones, right? You’d go and you start at the most expensive fee and you get as much money for yourself as possible. And then you can do other things like flip version bits if there’s soft fork activation going on.

There’s a whole bunch of things that you do within while constructing this template. You also create the Coinbase transaction, which is what the company Coinbase named themselves afterwards, which causes a lot of confusion. But basically there’s a unique transaction in every block template where the miner pays themselves newly minted coins. It has no inputs and there’s only one of them in a block. And typically a miner will pay themselves with that up to a maximum of whatever the subsidy is. You know, it was 50 bitcoins originally. Now it’s

then it was 25, then it was 12 and a half, and now it’s six and a quarter, plus any transaction fee revenue. You put all that in, you define the addresses that those new coins are going to, then you start hashing and you try and actually solve the block. And that’s it. That’s the entire process. The hashing is the very last stage, though you will keep updating the template as new transactions come in or new blocks get found, then you have to dump your work and start again, right? So that’s the entire process of mining. And

When you buy a Bitcoin miner or an ASIC and you stick it, you know, in your garage or whatever, in your mining, you’re doing none of that except the hashing. All of the other stuff has been done on your behalf by another entity. But back in the day, these were all one thing. This was the entire process of Bitcoin mining. And it started on general purpose computers, right? Which had the node on them. And we’re doing all of this stuff naturally. And then we’re just sort of, you know, bifurcated and just decided, all right, we’ll, you know,

Bitcoin Mechanic (05:14.39)
I forget the right word, but we sort of put everything in its own little areas and compartmentalized everything I guess. Yeah, yeah, I say compartmentalization is what happened and Bitcoin mining now is just sort of this one part of it. It is the proof of work component. It is the hardest part to fake, right? That you can’t fake hash power, like it has to have happened. Fair enough. But there’s a whole bunch of assumptions and, you know, game theory that’s kind of been naively…

Stephan (05:19.428)
like unbundled it, let’s say, yeah.

Bitcoin Mechanic (05:41.858)
just sort of accepted as, oh, it’s fine. It’s resilient. Does anyone have 51%? No, it’s fine. Like that’s basically the level at which people are sort of looking at it. And it’s a lot more precarious than that. And recent developments have come along. Like, you know, the China mining ban and the massive explosion of Foundry changed the dynamics of things a bit. And you have the top two mining pools, they’re collectively above 51% overtly. Like they’re not even hiding that.

And you need to go full KYC to be able to participate in mine with those guys. And there’s a whole bunch of reasons that you’re going to want to mine with bigger pools because well, there’s so many factors there that we’ll probably get into, but the fact that you need to go through this whole KYC rigamarole to do it is not good and they’re very proud of it. And a lot of their miners are actually, you know, proud to, well, to have sort of nothing to do with Bitcoin and to have this massive intermediary between the network and what they do as hashes.

Stephan (06:36.688)
Yeah, so let’s try to zero in on some of the centralization concerns. So obviously, there’s the angle that you mentioned of the individual, let’s call them hashes in this example, have an incentive to point their hashrate towards the big mining pools. And that is arguably a form of centralization. So can you just explain a little bit around why that is? Now, I guess high level, there’s a variability aspect, right?

Bitcoin Mechanic (06:57.942)
Yeah.

Stephan (07:06.784)
miners or hashers today, point towards a pool is because they’re not big enough to solo mine for obvious reasons. And so that’s why people are going to a pool because it helps smooth out the variability for them and gives them a certain amount of reward in a reasonable amount of time based on the fraction of power they’re pointing to that pool. So can you elaborate a little bit on that centralization there of

why hashes are pointing towards the bigger pools.

Bitcoin Mechanic (07:37.102)
So this is where the rubber meets the road in a lot of ways. And it’s daunting because there’s just so many elements to touch on here that I’m worried I’m going to miss some. But essentially when there’s one of the reasons we had, one of the most compelling arguments for not making blocks bigger back in the block size wars is that smaller pools are at a disadvantage already because they have to download more blocks from the bigger guys and verify them before they can start mining anyway.

They usually assume it’s valid and start mining on top of it while they do the calculation, but it’s still a disadvantage. If you’re mining on top of the last block and it’s a block you found, you don’t have that latency. Like you already know the block and you can already build on top of it. A one second advantage in a 10 minute race is not nothing. It’s not super significant, but of course, if you decided to make blocks bigger and bigger and bigger, it would get more and more advantageous to the big pools. They have all these little advantages like that.

Another one is basically more high level. What you’ve already mentioned is the reason you mine in a pool in the first place is consistency of income. In theory, you can solo mine and make exactly the same amount. That’s not really true. If the difficulty keeps flying up, you keep, if you mind for a whole two week period and you miss out and you had a one in eight year chance of finding a block. And now you’ve gone up to one in nine years, because the difficulty just went up. You’re not going to get that once in eight years ever that’s gone. So solo mining is not equivalent and be it below a certain threshold.

But ignoring that sort of technical detail, the reason you mind in a pool is consistency of income. You get a tiny fraction of what you would have, but you get it more frequently. So you know, you get more consistent income. Great. Obviously, the reason for it’s justified. But the point is, this, I think I refer to this as resolution in my article, because you’re only getting made whole once every 10 minutes by the Bitcoin network. And this is the pool rather than the hasher. So

If you’re saying we’re going to pay you out this much because we expect to earn this much from Bitcoin, if you’re a small pool and you’re only finding a couple of blocks a day, a period of bad luck can go on for a long time and it takes a while for you to get back to your expectations. The more blocks you find, the closer you get to what it is you actually expected to get as income. And what this translates to for a bigger pool’s perspective is they can operate on tighter margins because they get made whole more often, they can make more

Bitcoin Mechanic (09:59.678)
They can make tighter predictions in shorter timeframes. Bigger pools, smaller pools can’t really do that as much because it, they might go on a run of bad luck and it might take a while for them to get made whole by the network. So fundamentally it’s just more expensive and there is a threshold below which you cannot be a pool. You need a certain amount of hash rate to be able to get made whole and to have a reasonable run of, you know, good luck and bad luck balancing out with any two week.

Difficulty epoch. If you can’t do that, it’s not realistic to be a pool. So there is a fundamental limitation, at least with how pools work today, with how many pools you can actually have at once. So there’s that. There’s also the fact that far more maliciously, or you have this, um, you have this case study of gigahash.io or ghash.io, which collapsed because the network got spooked, they got above 40% of the hash rate and everyone went, this pool’s too big.

And they just immediately death spiral after that. Because if you run that kind of payout model, FPPS, which will, there’s probably its own topic, but, um, if you’re operating like that, you have, um, you’re basically writing checks and then expecting to be able to, expect to be able to cash them right now and expecting to get made whole by Bitcoin later, and if you write a bunch of checks and then all your hash rate leaves,

depending on what kind of buffer and margin you’re operating at, you can basically just go bankrupt very quickly because you have 100 blocks before anything you get from the Bitcoin network can even be spent anyway. You have this big buffer and the bigger you are, the more you can work with that and the more you can compensate and allow for some discrepancies or variation. But if all of your hash rate suddenly leaves and you’re an FPPS pool, it’s probably going to be a very difficult thing to recover from.

It wouldn’t be the same for pools that disintermediate a little bit more. Like PPL&S schemes where the pool doesn’t pay any miners until blocks actually get found. Then they’re not on the hook as much, but miners don’t like that as much for other reasons because then they have to care about whether actual blocks get found or not. Overwhelmingly, miners have decided, we don’t want to care about that. We just want to get paid for our hash rate regardless of what happens in Bitcoin, which has its disadvantages, but no one’s really paying attention to those.

Bitcoin Mechanic (12:17.846)
the last real holdouts that aren’t FPPS are basically abandoning it and going, we’re just going FPPS, which means the entire ecosystem now is mining pools saying, we are solo miners and we want to rent a bunch of hash rate and we will pay you some Bitcoin to do it. And it’s not even inconceivable that they would say, all right, you’re a big hasher. Okay. We’ll pay you a million dollars a month just to mine for us. And that’s it. Like in dollars. Like in this point, you’re just renting hash rate to a solo miner. It’s got nothing to do with Bitcoin mining.

Stephan (12:25.423)
Okay.

Stephan (12:43.644)
Right. Yeah. So on this, let’s just explain some of the pool payout schemes. So as you’ve mentioned, there’s FPPS and in your article, you also mentioned, I believe it’s PPLNS. Do you mind just explaining, you know, what’s FPPS?

Bitcoin Mechanic (12:57.887)
Mm-hmm.

Bitcoin Mechanic (13:01.974)
So FPBS means full paper share. A share is work essentially that you’re submitting to the pool. It’s proof of work. You’re saying, hey, I did a hash. It might not be a solved block. It probably isn’t a solved block. But hey, I did some work. I contributed to the solving of this eventual block. And rather than the pool say, well, ultimately, we didn’t find the block, so this work is meaningless to us, which is.

means less consistency of income. Instead, they’re saying, we’re going to make mathematical assumptions about the fact that every bit of work contributes probabilistically to the eventual solving of a block, and we’re going to pay you on that basis. So you’ve done this much hash, you’re going to get this much Bitcoin, and we’re going to credit you sap by sap for the work you do. Now, this makes assumptions that the Bitcoin network is entirely predictable, right? And the truth is it’s not. There’s a human element.

It gets, there’s a whole bunch of minutiae to get into with it. But from a minus perspective, it does, it’s a pool as a concept on steroids. It’s consistency of income down to the sat level basically. But the price is you have nothing to do with Bitcoin anymore. You are just leasing hashrate to a private entity that’s saying, don’t worry, I’ll take all the variants out of it. I’m going to go on solo mine. Just lend me your hashrate and I’ll pay you out of band for it. That’s all there is to it. That’s what FPPS is in a nutshell.

But the main point to realize is miners can’t be paid directly from Bitcoin in that model. Because well, there’s a few reasons they can’t. But one is that when with freshly generated coins, there’s an 100 block limitation before they can be spent. Because if there’s a real or something like that, those coins will just disappear. It’s not like transactions ending up in a block and then becoming unconfirmed again because there’s a real. Those transactions are likely to still ultimately end up in a block.

right? So there’s no 100 block limitation on any UTXO you just create for yourself. But freshly mined coins can just totally disappear from existence if a block gets orphaned. And so those ones, the income burn 100 block limitation. So the mining pools are dealing with that on the side, right? They’re dealing with all the freshly mined coins being totally unspendable and they’re still paying miners out of pocket. So that massive buffer means they’re a huge intermediary, right? It’s just, you know, it’s…

Bitcoin Mechanic (15:21.494)
To use a crude analogy, it’s just like you want to use SMTP, like, okay, I’ll get Google to do it for me via Gmail. Like, you have nothing really to do with email as a protocol at that point. You’re getting this huge third party to go and interface with the actual network or interact with it on your behalf. Like you’re losing all the guarantees of it. Like all the claims made about what, you know, decentralized messaging technology is, like, totally don’t hold water in a world where everyone’s using big data platforms for it, right?

All the claims you can make about Bitcoin mining, if there’s only like two or three people right now, you have a dozen entities. So, you know, two of them are already over 51%. Right. But if you add the, if you add up the block template construction, uh, you know, the people responsible for it, you get about 12 parties and they are it. If they say this transaction isn’t getting in the blockchain, it’s not getting it. Like, it doesn’t matter how distributed the hash rate is. If they say we’re not activating this soft fork.

it’s not getting activated. Like that’s it. Like it’s that is not decentralized in the slightest, right? Well, that’s FPPS. Yeah, sorry. It’s a lot to cover. So I’m going to try and keep it like, you know, I appreciate you sort of. Yeah.

Stephan (16:24.292)
Gotcha. Yeah. OK, so yeah, I think that’s right. And so now, if you could explain what’s PPLNS.

Bitcoin Mechanic (16:34.53)
So that’s pay per last end shares. So what that does is you tend to see a sort of ramping up and down of rewards. What it does is it takes the pool off the hook for having to make themselves whole. So the pool, by abdicating the responsibility of dealing with all the variants and actually passing it back to the miners, they can run a much more disintermediated operation. So as a miner, you actually care when blocks get found, you…

you aren’t leaving the pool on the hook for anything. So they’re no longer a significant middleman. And what you actually get paid is something you can actually tie back to the blockchain, which means you can actually verify stuff. Because in FPPS, you’re never getting coins that were freshly mined because you can’t be by design of the system. But that makes verification basically impossible. And I’ll get back to PPLNS in a minute. I’m just realizing what I’ve left out for FPPS.

So verification is the name of the game, right? And the reason that FPPS is such a problematic model is because it spawns from early day Bitcoin that is not what Bitcoin is gonna look like in the future. And what I’m really referring to here is the fact that once upon a time, you could say, I have this hash rate, this is the difficulty, how many Bitcoin am I gonna get? And the calculator will say, well, you get 50 Bitcoins every 10 minutes overall, here’s your cut of that.

And then first halving happens and it’s, well, you get 25 bitcoins every 10 minutes and here’s your cut of that based on your hash rate and all that. Then it’s, well, there’s 12 and a half bitcoins plus a smidge of transaction fees, which are kind of hard to predict. So we’ll just kind of leave them out of the equation. And then now you have transaction fees, like regularly going above what the actual subsidy is and transaction fees are totally unpredictable. So all these predictions people make the FPPS model is one where they have to

make, they have to say what you’re going to get per share and they have to tie that into what the income of the actual network is. But there’s no way to predict that anymore because the network is sustaining itself with transaction fees rather than subsidy or it’s transitioning to doing that. That is the design of Bitcoin. We know that’s how it’s going to go. So how do you sustain FPPS in that model? You have to do all sorts of behind the scenes calculations and

Bitcoin Mechanic (18:53.366)
When weird things happen, like yesterday, where someone made an 84 Bitcoin transaction fee, and like a few months ago when someone, when F2Pool got a $19 million transaction fee by mistake. And, you know, what do you do in the FPPS model with that? Because it’s pretty much guaranteed that miners are never going to see that money. But the point is they never have it in the first place. The pool can either decide to give it to them.

or they can decide to give it back to the guy that made a mistake. But again, the fact that this is massive intermediary between the miners and the Bitcoin network itself means it’s not up to the miners. So all this to tie it back to a PPLNS pool. If the PPLNS pool operates in a way that PPLNS allows, it doesn’t always have to do this, but PPLNS can allow for immediate payout to the miners where they are getting their split of whatever’s in the block in proportion to whatever their hash rate was.

Stephan (19:45.828)
Right, but still with the 100 block limitation, correct? Yeah.

Bitcoin Mechanic (19:46.254)
over a window. Yeah. Yeah, exactly. But it can be in their custody already. So then it’s on the miners to say, all right, we’re going to give this guy back his money. He made a mistake. But this is essentially what I’m describing here is more like a proportional payout system where you just get paid out in proportion to what your hash rate was as and when the moment the block was found. Now, in theory, that works great, but that caused this problem called pool hopping back in the day where people would keep coming in and exiting a pool depending on what

was going on with, you know, at that specific time and they could game it. So PPLNS is a solution to that where your reward ramps up and down. If you come and start mining at a pool, if the, if the, if the window is eight blocks, if depending on the size of N, um, then if the pool, if you start mining with a pool and it finds a block, you get an eighth of what you would have gotten. And then if they find a second block and you’re still mining, then you get two eighths of what you would have gotten.

then three eights and four eights and so on. And if you’ve been mining for the last eight blocks, you get your full cut of what you’re supposed to get. But if you stop mining, then you get seven eights and six eights and five eights and four eights. So in theory, everything you do is ultimately counted as long as the pool doesn’t suddenly stop once you reach eight blocks or before you get to the, to, you know, one eighth as you quit the pool, it needs to find eight more blocks or seven more blocks so that you get fully rewarded.

Stephan (20:49.104)
pay out, yeah.

Bitcoin Mechanic (21:09.942)
That’s PPLNS and it stops pool hopping and it still works out basically the same. Assuming the pool doesn’t die within any eight block or 16 block window, then you’ll be fine. That’s what PPLNS means. And it takes, it brings all the variability back, but it can provide for paying miners directly in the Coinbase transaction. You just have to have the pool construct the templates so that Coinbase output, the generation transaction has the Bitcoin addresses of the miners.

that actually did the work. And there’s a limitation to how many you can put in there because a block’s only so big and you can only stick so many outputs in a Coinbase transaction without making some miners have some hissy fits, but like, I mean, actual ASICs, but that’s basically what PPLNS is. It basically minimizes the pool’s role as much as it possibly can. But I mean, we’re gonna talk about Ocean at some point anyway, and we use something a little different to PPLNS because it’s…

It’s developed a bad reputation. People associate it with not getting the money they would expect. Uh, but there’s a whole bunch of reasons for that. There are much more obvious smoking guns in my opinion, and aren’t really spoken about, but I do go over them in the article a bit. And also PPLNS tends to use a sort of low resolution, um, shift based concept where you get, where you, some of your hash is just kind of lost due to resolution issues. And.

The idea that if you would do something reminiscent of PPLNS where you don’t have the concept of a shift and you count every single hash that the miner does or every single accepted share that’s full resolution and that’s what PPLNS should have been in theory, but the fact that it isn’t means we came up with a different payout name altogether because people are just going to get the wrong idea if we called it PPLNS even though it is somewhat reminiscent of it.

Stephan (22:57.608)
Interesting. Okay. And so I guess explaining sort of at a higher level, as you’ve explained, or summing up what we’ve spoken about, there’s been this incentive over time for, let’s call them hashes now, to sort of be treated like customers and the mining pools to really be the actual miners. And it’s almost like a business relationship now, where as you said, it’s almost like they’re renting hashrate and because they want to provide certainty,

there’s sort of been this drive towards FPPS. And so that’s what you’re saying. There’s been this drive towards FPPS because the hashes or the individual miners with their ASICs, they want certainty and they want that reliability. They want to take away some of the variability. They just want to get consistency in their, you know, Bitcoin mining rewards. And I guess in terms of what are the issues with that, as you said, it sort of represents a bit of a centralization of…

Bitcoin Mechanic (23:27.97)
Mm-hmm.

Bitcoin Mechanic (23:36.417)
Yeah.

Stephan (23:54.404)
Bitcoin because now those individual miners aren’t doing as much verification as they would have. They’re not doing as much transaction selection as they would have. And also in the case of soft forks, they are not the ones doing the version signaling, version bit signaling. So I guess those are probably the main critiques. Or do you have any other sort of points you’d like to?

Bitcoin Mechanic (24:14.11)
Yeah, no, for sure, that’s a great summary. The way I like to visualize it is just like slaves building a pyramid with blindfolds on and being told, because you’re not allowed to know what the eventual block will look like until it gets found, which is, you’re working blindly on something. And this is manifested in some outrage before. So the example is when Luxor mined the first Ordinals block.

They put a giant JPEG, you know, a bunch of JavaScript inside the block. It filled up the entire block. They were paid for it out of band. The total transaction fees in that, in that block that miners got, if they even got it was $200 and either side of that, the blocks were around $5,000 in transaction fees, right? So straight up, they were mining on a block that was totally costing them money that they were expecting to get. And Luxor did it, you know, privately.

because they are a private entity constructing block templates on their own behalf and they’re paying hashes. You know, just go and solve whatever this is and you’re not allowed to know what it is. We’re not going to be transparent about it. And then we’re going to surprise a network with it. And it’s, you know, it outraged some people, but most people just kind of accept it as a status quo and go, that’s fine. Like, so the point is as a Bitcoin miner, you are supposed to be the architect of what goes into Bitcoin’s blockchain. It is something you’re supposed to care about.

And there’s financial implications for not doing that. It’s not just an altruistic claim where I’m saying, Oh, you should be as sovereign as possible as a miner. Really, when you place this intermediary between you and the network, you have no idea what’s going on when it comes to transaction fees and template construction. So not only do you not know if they’re going to put in lucrative transactions, because from your perspective, you want them to choose the highest transaction fees.

From their perspective, they can say, oh, some ordinals guy is going to pay me $10 million to fill up the block with crap. And it can all be zero sap per byte from the Bitcoin network’s perspective. Yeah, those transactions wouldn’t get relayed around the network, but they’re still acceptable in a block and they won’t invalidate the block. So that’s what the first ordinal transaction was. They didn’t pay anything, not from Bitcoin’s perspective. It just got handed directly to a mining pool. And they went, all right, we’ll screw off the whole rest of the block template and fill it up entirely with this JPEG.

Stephan (26:02.616)
Out of band, yeah.

Bitcoin Mechanic (26:25.386)
And it just, it makes no money for anyone. From Bitcoin’s perspective, it makes no sense. And from the miners perspective, it makes no sense. But the pool got paid out of band. And this gets, when you sort of consider complying with government regulation and stuff, a form of out of band payment, which it kind of is like, we’ll shut down your pool unless you, you know, ban these OFAC transactions or whatever, that all appears economically irrational from the perspective of the Bitcoin network, right? Why are you forgoing these transaction fees? But.

From the pool’s perspective, it’s totally rational, right? They’ve got a gun to their head. If you want to stay in business, you can’t do X, Y, Z. And from their miner’s perspective, they’re saying, what are you doing? But this is what happens when you place an intermediary between you. And this is before you even mentioned the fact that how do you know that they’re actually sharing the transaction fee revenue correctly? It’s totally opaque. How can you verify this? It’s, it’s incredibly difficult. Every pool has its own way in which it makes miners whole. It can say every 24 hour period.

For example, we add up all the transaction fees and we distribute it proportionally amongst all the people that are mining with us at the time. But good luck verifying that. You didn’t really need to years ago because all of the reward was subsidy. So fair enough. But in the modern day Bitcoin and going forward, it’s all going to be transaction fee revenue. So I don’t think people can afford to carry on trusting pools so much to distribute this accurately. So I think there’s financial implications. There’s a violation of your sovereignty.

And it’s just laboring under potentially false premises, right? You have no idea what the finished product you’re working on actually looks like. And you don’t know what’s going into the blockchain. You’re just working, and you’re getting surprised every 10 minutes by saying, oh, that’s there. Like, so when F2Pool annoyed everyone a few days ago by, you know, omitting transactions that related to a database, you know, the OFAC database, again, everyone just finds out after the fact. They never get.

privy to it before the block is actually, you know, being worked on. So at some point I’m transitioning to talk about our pool and well. Yeah.

Stephan (28:28.416)
Yeah. One other question before we get there, because I think this is going to be the obvious question on people’s minds is they’re going to be thinking, well, what about Strata and V2, right? They’re going to be thinking, well, Strata and V2 has protection against man-in-the-middle attacks. It provides the ability for individual miners or hashes, in this case, to actually select blocks, sorry, to actually select transactions that go into a block template. And so, how much does Strata and V2 fix these things?

Bitcoin Mechanic (28:40.503)
Mm-hmm.

Bitcoin Mechanic (28:54.05)
So Stratton V2 is pretty much a no-brainer upgrade. It fixes basically a lot of things without any trade-offs at all, apart from one smaller trade-off, which comes in the form of detecting block withholding attacks, which no one talks about, which are actually a serious problem at the moment. So maybe I’ll go into, I was going to talk about that a minute ago and it slipped my mind. So maybe I’ll talk about block withholding attacks here just for a second before I get into that. So.

Stephan (29:20.48)
Okay, yeah, let’s get into that. So what is a block-up withholding attack?

Bitcoin Mechanic (29:24.598)
So here’s the situation, right? But back when I mentioned this at the beginning, so you had a big pool that got too large. It got above 40%, and everyone got spooked. The hashes all fled the pool, and it just died. It didn’t get smaller, it just died. Because that tends to be what happens if an FPPS pool gets bailed on. So this sort of fits in with.

the narrative or the cope, I’ll call it, when people say, don’t worry, if one entity ever gets bigger than 50%, everyone will just abandon it. Look at G hash. It’s fine. Don’t worry about 51% attacks. But the problem is that didn’t manifest in pools never getting that big. It just manifested in them never looking that big, which is very, very different. So I’ll explain what I mean. If you’re at 30% of the hash rate,

people are going to continue mining with you for a whole bunch of reasons. There’s loads of incentives to use the biggest pool there is because they, you know, they have the tightest margins. They can operate that way. So as a result of that, the bigger pool says, all right, we don’t, all this additional hash rate that’s coming into our pool is good for us, but it’s going to scare the network if we show the world that’s what we’re doing. So the world only ascertains how much hash rate they have by how many blocks they’re finding, right? And.

the pool’s own transparency and they’re not transparent at all. Right? So what they can do is they can redirect their hash rate to smaller pools and make it look like those smaller pools are where some of the hash rate is ultimately ending up, even though it’s going through the bigger pool. So what that does is it gives a false impression to the network about where the hash rate is actually pointed. That’s not great because it gives us a false sense of security, but it’s not in and of itself the block withholding attack. That’s additional to this and it’s kind of independent of it.

But what this means is you can take, for example, a big pool can take, you know, one or 2% of its hash rate, point it at a smaller pool and act as a normal miner there. So when that smaller pool finds a block, it shares it amongst this redirected hash rate, just like it does everyone else. Everyone’s fine. Everyone’s getting what they’re expected. The money goes back to the bigger pool and ultimately back to the hasher who has no idea that hash rate isn’t really pointing at the big pool. It’s, it’s going to a smaller pool, but ultimately it’s still getting the money it expects.

Bitcoin Mechanic (31:35.85)
Nothing’s happened yet. But what can happen is when the redirected hash rate, when it finds a block, it can just not tell the smaller pool about it. So if this is 1% or 2% of the big pool’s hash rate, it redirects that hash rate to the smaller pool. And then that smaller pool, that 1% or 2% might represent 20% of its total hash rate, right?

So what this means is the smaller pool looks like they’re having bad luck to the tune of 20% less revenue than they’re supposed to be getting. This kills the pool. It’s dead as a result of that. And I don’t know what I can say here because it’s a very public podcast, but we have pretty good evidence that this has been happening. And we actually know it happened back in 2015. There’s the pool. Small pools were attacked this way back in 2015. So it’s not a theoretical attack. So from the small pools perspective, we’ve had 20% bad luck. Everyone’s bailing on us. Everyone’s going to the bigger pool.

from the bigger pools perspective, they’re still getting all the rewards from the 80% that’s still getting found by other hashes in that small pool. The 20% they’re not telling the smaller pool about represents barely anything in relation to how much it’s getting having by this hash rate only operating as 1% of what its total capacity is on the sort of transparent side of what it’s doing. So the bigger pool barely loses everything, loses anything. The smaller pool loses out on 20% and dies as a result.

And from the perspective of everyone else on the network, it just looks like you’re only getting 99% or whatever of the total amount of blocks in any period. It looks like, hmm, we’re finding a little bit fewer blocks than we expected during this period, but whatever, it’s variance. That’s what it looks like. That’s the block withholding attack. And it’s something that, again, it’s a disadvantage that smaller pools have and that bigger pools can just exploit. And it’s very difficult to pick up on because as a pool, your only way to really

to figure out that you’re being attacked this way is you have to look at all your hashes and you have to say this guy should have found a block by now. In fact, there’s a 99% chance he should have found a block by now and he hasn’t. And he’s sitting in here sharing in all the rewards that everyone else is getting, right? Because we assume he’s mining honestly, but he’s not. So I have to kick this guy off the pool or just not include him in the rewards, right? This is the only way you can do it. And then…

Bitcoin Mechanic (33:57.79)
You know, this encourages horrible things like I need to KYC all of my miners because I need I need to be able to go after these people legally if they’re attacking me this way. And that’s not nice. We don’t want to we don’t want to have to do that. We don’t want to place KYC requirements on between miners and pools, which is kind of organically happening anyway. So anyway, back to stratum V2. It’s harder to detect that this that hash rate is being redirected from a bigger pool to a smaller pool in a stratum V2 world. That’s the only disadvantage of SV2.

It’s not nothing again, but everything else about Stratton V2 is better. You have encrypted communication between pool and minor, which is great because currently I don’t need to go so on about the benefits of SV2 because I mean, it’s already been done really well. There’s a great podcast with Aaron Van Weerdum and Yan. I can’t remember Yan’s last name, but they explain SV2. Real quick summary. Right now, Stratton V1 has plain text communication between

Bitcoin miners and pools, which means your ISP and the three letter agencies know that you’re mining, they know how much you’re mining and they can man in the middle you and make you do hashing on their behalf as well. So you’ve got three major disadvantages there. SV2 fixes all that. That’s the no brainer, low hanging fruit part of it. It doesn’t really decentralize anything, but it just buttons up the whole process, right? And gives us something, you know, semi respectable as a means of communication. But more importantly, it allows for a block template construction.

on the miner side, which means that the pools start to become much more of a, you know, a disintermediated dumb liais between miners who want to split reward and get more consistent income without all the other trade-offs of, oh, we have to work blind, we have to totally guess that we’re getting the correct reward split. All this stuff disappears because you can, in theory at least, I mean, this is yet to be proven that it’s super workable or that miners won’t just, or that pools won’t just

some of the problems that exist today. You still have to allow, the pool still has to allow you to use the template you wanna use. In theory, the only thing that…

Stephan (36:05.092)
Meaning, including the transactions that you would like to include. Yeah.

Bitcoin Mechanic (36:08.038)
Exactly, right. In theory, the pool should only, in a perfect world, the pool will only care that you have the correct split if the Coinbase transaction is paying out as many miners as it can as a reflection of the proportion of what the current work is, or over a PPLNS window, or whatever it is. But the pool can care about more than that. They can say, oh, you’ve included this OFAC non-compliant transaction.

Okay, we’re not accepting your template. That can happen, right? So SV2 doesn’t magically force pools to accept all templates. It would be nice if it did. Maybe it can. And I don’t know whether that’s actually possible, but I definitely know everyone wants it to be possible. So we’ll see.

Stephan (36:48.704)
Okay, yeah. Alright. So, yeah, and I’ve got a bunch of episodes on Strata V2 also, but let’s proceed on and talk a little bit about what Ocean is and, you know, what is Ocean doing.

Bitcoin Mechanic (37:00.498)
Right. So thanks for sticking with me, everyone that’s heard me just rant about all that so far. Definitely there’s solutions. So the reason we call it Ocean is because we’re juxtaposing that conceptually with a pool where no running, no bombing, no eating in the pool or anything. It’s an ocean. So you do what you like, you get in it. There’s no permission to get in an ocean. Right. So there’s a bunch of ways in which it’s different. First off, it’s not an FPPS pool.

Right. So this gives us a whole bunch of options for what we can do. Um, we’re calling the payout system tides rather than PPLNS. Some of that is to get away with the negative from the negative connotations of PPLNS, but it really is different as well. It’s, it’s, uh, it tracks every single share a miner is doing. So you will be getting rewarded for every single hash. There’s no weird loss of stuff due to poor resolution in a, you know, a score system or something, or just PPLNS itself as it’s usually implemented.

So what this means is, well, we construct templates in a way that miners are actually paid out in the block template themselves to the greatest extent that they can be. You can’t pay everyone out that’s mining with you in one block because some people are only mining 400 SATs, right? And why would you even want a UTXO with 400 SATs? It would be useless. But to the greatest extent we can be, we’re doing that. So

This is a relaunch of an old pool, which I should have started with. So back in the day, exactly the patron saint of mining, this was Loot Jr’s project. He ran it with WizKid, Jason Hughes, the famous Tesla hacker. And what you can go and look at blocks from back in the day that they mined then. And the biggest, I think the record was 903 people were paid out in a coin based transaction. So that was everyone mining at the time.

Stephan (38:31.164)
The Illegious Pull, right?

Bitcoin Mechanic (38:56.222)
or, you know, there might have been more than that, but 900 people got paid by the Bitcoin network themselves for mining. So this is radical disintermediation, right? The pool didn’t come into custody of those Bitcoin. They mined and Bitcoin paid them. And this also means like into in true, I like to make draw the analogy between going into Bitcoin from the fiat world. It’s easier. People think it’s difficult, but I’m like, we’ll try and get a credit card.

Like see how much of a pain in the butt it is to get a credit card. It takes forever and you have to go through a whole bunch of, you know, uh, rigmarole with us, mining with us looks like this. You go into your ASIC interface, you put in the pool’s address, then you put in a Bitcoin address as the worker. And that’s it. You don’t even need to go on the website. That’s it.

Try and mine with Foundry or Antpool and do a comparison and be like, I literally can’t figure out how to do this. Like I need to submit endless documentation and I’ve got to resubmit it every time period or whatever. With us, it’s just, it’s permissionless. You come along and you mine with us and that’s it. You stick a Bitcoin address in. If you want to identify, if you want to have 10 miners all mining to the same Bitcoin address, you can just append it with additional info like this is my S9, this is my S19, this is my Watts miner or whatever.

and they can all come to the same Bitcoin address. Then you go on the pool on ocean.xyz, you look at it and you can just click on your address and you can see exactly what it’s doing. And this is all publicly available info. And then when the payouts happen, you can verify the split of everything amongst all the participants. So this is why I call it TIDES. It stands for, let me make sure I get it right. But the first letter is transparent, which it should be, because there is nothing transparent about the FPPS model. Our

Our pool is you can, you can verify everything that goes on with it. So I should say what the tides acronym stands for. So it’s transparent, which is self explanatory index. This is the, the fact that it has a large share log over, you know, um, uh, N is large and it covers eight blocks, right? So you have 16 blocks of relevance to you at any one time, really.

Bitcoin Mechanic (41:02.074)
It’s distinct. That speaks to the fact that unlike PPLNS, there’s no loss of resolution. And it’s extended. That, again, represents the high value of n. And shares is self-explanatory. That’s the s at the end of tides. That’s just everything you submit as the work you’re doing. So real quick summary, because I’m trying not to overload with information, as I always do.

If you mine with Ocean, it will have launched yesterday, I believe, if we’re releasing this on the 29th. So what that means is if you want to mine with Ocean, you can do it permissionlessly. You don’t need the permission of a big pool and you don’t need to rely on us being honest because you can verify everything that’s going on. All you have to do is go into your miner, put in Ocean.xyz or mine.ocean.xyz for the mining address.

And then you put a Bitcoin address as the worker name or the account. And that’s it. And then you can go on ocean.xyz and then look at the stats and just see what it is your mind is doing. And that’s it. You get paid directly from the Bitcoin network. We don’t take custody as long as you’re above a certain threshold, as I mentioned, because you don’t want to be dealing with tiny UTXOs, cause that’s bad for everyone. Uh, it’s at 0%. I can’t believe it took me that long to mention this. So there is no fee.

There will be a fee eventually, but I’ll go into why everyone is going to want us to charge a fee at some point. That’s, uh, but that’s phase, uh, that’s later on. Uh, and, um, yeah, that’s, that’s basically it for phase one. And I will say it’s a proven concept. We were, uh, this pool was run for years. I used to mine with this pool with that. Uh, where is it? Do I have it? No, I don’t. Uh, I don’t have it in shot, but there’s my old butterfly labs, jalapeno minus sitting on that desk over there, which is six giga hash.

They used to mine and that was like a Bitcoin every three days back then. And it still costs more in electricity than I should have just bought electricity like bought Bitcoin instead of electricity. But yeah, I used to mine with this pool. It’s a proven concept. We’re just relaunching it as it is. And then next year, a whole bunch of new tech comes in where I’ll probably get into that in a minute.

Stephan (43:08.14)
Yeah, OK, great. So let’s just talk a little bit about.

So for example, our friend Bob Burnett has spoken about the problem of, you know, a lot of people, and people were talking about this for years, but he’s spoken about this problem of people who have very small denomination of UTXOs. So what’s the fix here going to be? Because if a lot of users are on this and taking a lot of small UTXO payouts, are they just gonna have to consolidate over time? Or like, how do they do it?

Bitcoin Mechanic (43:39.694)
Well, the current threshold is around a million Sats, which means your payout will occur as a Coinbase transaction, but not until you’ve accrued that much. And I want to be careful with my language here because it shouldn’t be considered custody, even though it can be viewed that way. But the point is…

Stephan (43:50.831)
Okay.

Bitcoin Mechanic (44:01.618)
If someone mines with us and they mine 50 sats and then they disappear, talking worst case scenario, so they might, they plug in their S nine for 20 minutes and mine a few sats and then they disappear forever. And we’ve got their Bitcoin address and the sats are lying around. They will be paid out algorithmically. They are just going to get it eventually, but we do everything we can to avoid not allowing them to get a bigger, more sensible balance before a payout occurs. So if they plug in again and they mine another five sets, reset the timeframe. Like, okay, all right.

like we’ll wait another six months or whatever it is like, we don’t want to be bloating the network with tiny UTXOs. We don’t want to be taking custody either. So here’s basically how the, how the thing works. Everyone that can be paid out in the Coinbase transaction is paid out. There’s a fundamental limitation to that. Blocks are only so big and you can only make Coinbase transactions so big as well. So, you know, if you’re a mega miner, every time a block is found, you’re going to be paid directly from the Bitcoin network. If you’re a moderately sized one,

probably the same. It depends how many people come along and use the pool. Obviously, there are fundamental limitations within Bitcoin itself, but to the greatest extent possible, miners should just be paid by Bitcoin themselves. And that’s all there is to it. And they can be. There’s no excuse for not doing that, right? At the moment, because there’s about 12 pools, I’ll make this point, there’s around 12 pools, which means all new custody, all custody of every newly mined Bitcoin in the world is going to the same 12 people.

Stephan (45:13.584)
Gotcha. Yeah.

Bitcoin Mechanic (45:29.258)
I mean, it’s reminiscent of the Cantillon effect. I mean, it’s not the same because it’s not an inflationary thing.

Stephan (45:35.02)
Yeah, it’s a different dynamic, but yeah. All right, but let’s get into this other angle because I think it’ll be interesting for you, or at least for people to hear your explanation. Are there any particular size of minor that you’re targeting? Are you targeting medium-sized minors? Are you targeting big minors, small minors? Or is it just open slather?

Bitcoin Mechanic (45:54.298)
Absolutely pleb miners. We’re targeting them because they’re the ones that suffer the most under the current system. If you’re a huge miner, you’re a massive asset to a pool and they will roll out the red carpet for you. And then you get all the benefits of being a big pool and then everyone wants to mine with you and all the small guys, you just charge them through the nose. So the current model of mining pools is we give the big guys a free ride and we subsidize that model by charging the small guys as much as we can get away with and they’ll pay for it. You know, I mean,

In reality, a hasher is providing a service to a pool, not the other way around. It you think, you think if someone was like, Hey, I’ve got blocks I want in the blockchain, I’ve constructed them in a certain way. I’m selling the block space out of band for millions of dollars. I need to go and rent a bunch of hash rate to actually solve this thing. And then you’re like, okay, well, how much are you going to pay me? No, no. Um, you’ll pay us like what it doesn’t make any sense as a dynamic, right? Like I need like, I’m foundry. I need this block in the blockchain.

I’m not a miner myself. I need to reach out and get all these people hashing it and solve it for me. And they’re going to pay me to do that. Like it seems kind of weird, right? And that is actually the accepted dynamic at the moment. So, and they pay a lot. So these, so these pleb miners, it’s a no brainer to come and mine for 0% in a transparent pool. There’s the only caveat is, like I said earlier, there is a certain threshold you need to cross before a pool becomes an actual realistic thing to be operating because.

Stephan (47:01.884)
I mean, you did mention… yeah, go on, go on.

Bitcoin Mechanic (47:19.482)
You have two week difficulty adjustments, and you have to find blocks within that period. And it has to be a reasonable amount of them too. So if you’ve only got a few Peter hash, that’s not enough to run a pool. So there is a threshold. So to answer your question with a little bit of nuance, we need a certain amount of hash rate. So if that is one big entity that comes along and provides it, great. And then all the plebs, it’s a no-brainer for them. Without that big entity, we need enough plebs to make it viable.

And so I don’t even know what that’s going to look like. Maybe we get a flood of enthusiasm. It’s only been a day, right? At the time we’ll be broadcasting this. Maybe we’ve just gotten a flood of enthusiasm. Maybe no one cared at all. Who knows, right? But it’s, it’s a very important project to exist as an ethical one. Everyone involved in it, like Luke and myself and like we’re doing this because we love Bitcoin. It’s, you know, it’s, it’s a for-profit company, but at the same time.

Like no one will be doing this if Bitcoin didn’t need it, right? The state of mining is just getting so bad that we’re like, all right, we’ve got to do something. So yeah, it’s for plebs.

Stephan (48:19.7)
Yeah. And the other question people will have, and you mentioned, you touched on this earlier, which is that the pool is starting with zero fees, but you mentioned there’s a reason why the pool participants would want there to be a fee. So can you just explain a bit about your thinking there? Why would they want that?

Bitcoin Mechanic (48:29.271)
Mm-hmm.

Bitcoin Mechanic (48:33.686)
Right.

Right, so what the plan is for 2024, so what we’re relaunching with is what the pool already was back in the past anyway. It’s a proven concept. We’re just bringing it back. It was run as a hobby before. We’re just bringing it back as part of a for-profit company, but at 0% again like it was back then. But it gets far more sophisticated for this than this in 2024, mainly in two forms. One is we incorporate Lightning Network.

So that makes sense because Lightning is, you know, the Bitcoin Lightning network protocol is one thing. You should treat it as that and you should incorporate Lightning. And basically what you want to solve is how can smaller miners get around the fact that they’re going to be dealing with small UTXOs? I mean, you already asked about this and it’s prescient, right? Because it’s going to get less and less realistic. What you really want is for a miner to be getting their money straight in Lightning without having to wait around for ages. So current pool model is if you’re a small or even medium miner,

As on-chain transaction fees go up and up and up, and as subsidy goes down and down and down, you’re going to be dealing with smaller and smaller UTXOs. And even if they would stay the same size, they’d be getting more and more expensive in dollar terms and whatever terms you like. So the solution that’s going to present itself by default in the current world without our pool is pools themselves become bank accounts.

that’s what’s going to happen. So if you’re mining with a giant mining pool and you don’t want to deal with tiny on-chain UTXOs, you’re just going to leave your rewards in the pool for months or years until you get enough for a UTXO or an on-chain transaction to actually make sense. That’s not good. And the pools will just develop infrastructure and operate like banks. All right, if you want to send money, just send it internally with inside, inside Ant Pool or Foundry’s own database. Like everyone’s got accounts now. Like, you know, I have the Ant Pool app.

Stephan (50:25.376)
Yeah, and I know, I believe NiceHush has had lightning payouts for a while, so that’s another example.

Bitcoin Mechanic (50:31.298)
Right. You can incorporate Lightning, but it depends how you do it. Right. So what we want to do is we bring about a liquidity provider. It’s not us. We just liaise so that someone can say to this hasher over here, okay, you’ve got an S9, you’re barely mining anything. You’re mining 40 Sats every day. I’m going to buy, I’m going to have the pool reassign the reward from your work to me, and I’m going to pay you what you would have gotten over Lightning.

And all this is provable and transparent, right? So the liquidity provider, bear with me here. They say, all right, you Mr. S9 miner, I’m going to give you the 40 sets you would have earned in the block reward, but actually I’m just going to give you 39 sets because I’m doing you a service here. I’m saving you an on-chain transaction fee and I’m saving you waiting around a hundred blocks and I’m saving you aggregating yourself, any of this stuff. Are you going to sell it to me for 99 cents on a dollar or whatever? There’s a free open market, right?

And the hashes can all say, this is actually great for us, right? I’ve only got an S9. I can have instant liquidity in my lightning wallet and I just need to plug in my miner and go, and I will sell everything at 2% below what I would actually get if I waited around for the on-chain stuff, but I get immediate liquidity and I can just, I can literally plug in an S9 and just be able to buy a coffee a week from now, like with the sats that slowly go into that. That’s amazing, right? The liquidity provider on the other hand, they can do this on mass.

So they can find the 8,000 smallest miners of the pool by all of them, uh, by the rights to all of their work. And then they just get one giant on-chain UTXO. That’s it. So they, what happens is the network is made, is more efficiently used from everyone’s perspective. None of the small miners have to have individual UTXOs. It all gets aggregated into one giant thing that the liquidity provider does, they get to generate income for themselves because they.

They have 10 bitcoins and they can buy 10 bitcoins worth of tiny miners income. And they, for putting up the capital and paying everyone out in lightning, 10 bitcoins, they get, yeah, they get 10.001 Bitcoin or whatever, but it’s all provable, right? And it’s all transparent. So it’s a no brainer for the liquidity providers perspective. And, and they’re providing a valuable service to the small miners who just realistically cannot deal with on-chain UTXOs and from everyone else’s perspective.

Stephan (52:30.88)
Right, they get a small cut, yeah.

Bitcoin Mechanic (52:48.406)
the node runners, the people that actually care about what goes in the blockchain, they don’t have to deal with masses of bloat and unnecessary inefficiencies of usage because the pool aggregates everything and eventually makes a giant UTXO for the liquidity provider and it’s all just a very efficient usage of stuff. So that’s the liquidity market. That’s the incorporation of the Lightning Network. It’s different and more disintermediated than you would have with something like NiceHash where they’re just saying…

Oh, we’ll deal with it all poolside and we’ll just let you have lightning withdrawals. Like, yeah, yeah. Yeah. So any pool can enable lightning withdrawals whenever it wants, but it’s not going to work in this elegant manner where you have liquidity providers that come along and do that and aggregate stuff together and actually use the blockchain more efficiently. That’s really elegant. Though I admit it does present some pretty strong technical overhead. So pretty hefty.

Stephan (53:17.436)
just do payouts, like custodial payouts basically, yeah.

Stephan (53:36.152)
Right, and potentially it might be a little bit less on the, you know, if tides is transparent, it might be a little less transparent if now you’re taking transactions off the chain, but I think something has to give somewhere, right, to be able to get the efficiency.

Bitcoin Mechanic (53:49.798)
Yeah, I don’t know the full implications of it yet. And like I say, it’s not a trivial thing to implement. It’s going to be verifiable because at the end of the day, you can prove a Lightning transaction happened. Just because the network is by its nature more private, and we love that about it, you can still verify that actual transactions happened. So there’s that element of 2024.

Stephan (54:16.429)
Yeah.

Bitcoin Mechanic (54:19.658)
the holy grail of decentralizing Bitcoin mining, which is decentralized block template construction. We already talked about it with Stratum V2 because it allows for that and we will leverage that. And there’s not really so much more to say about it, except the fact that at this point we will be charging fees, but fixing the one hole in the plot with Stratum V2, which is how do you incentivize miners to actually want to construct their own block templates? It’s the same problem as how do you make everyone run a node?

Some people just don’t care and they won’t do it. The only reason you can get them to do it is because they’re sick of getting robbed by not self-hosting, right? So Mount Gox has happened and things like that. Not directly related to running a node, but if you want to self-custody and you want to use a wallet, it’s great if that wallet’s connected to your own backend or your own node, right? So you kind of need bad things to happen for people to really care about it and do it, but that’s not necessarily enough. If you could pay everyone that ran a node to run a node, that would be great, right? So at this point, we’re charging fees.

But we’re saying these fees of 2% will drop to 1% for anyone that constructs their own block templates. So yes, there is more complexity and more technical overhead, but this radically decentralizes the network. So the pie chart, if everyone’s mining with us and everyone’s constructing their own templates, ideal world, it doesn’t look like Ocean is 100% of the chart. It just looks like there’s thousands of slices of pie, because everyone is constructing their own templates. And my favorite contrast with the pie chart

Stephan (55:42.105)
Ciao.

Bitcoin Mechanic (55:44.818)
modern day normal status quo mining is if Mara pool came along and went, we are going to, you know, Oh, fact comply again, instead of everyone going, that’s really bad. Can you stop doing that? And they go, all right, we’ll stop. Everyone just laughs at them instead. They’re like, that’s an absolute joke. Like, so one eight hundredth of this pie, this tiny sliver of like turquoise color or something tried to censor something. This is the joke at this point. Like there’s so many people constructing templates that it’s a joke. And it also is essential because

Stephan (56:06.426)
Yeah.

Bitcoin Mechanic (56:13.842)
Selling block space out of band is a really, it’s an emerging market and there’s not really a lot we can do about it. And it really degrades everything because you need the mempool. You need a mempool to be a reliable indicator of what’s about to end up in the blockchain. And if there’s only 12 entities constructing blocks, they can just ignore that and they can start selling block space out of band. There’s loads of people talking about this. Bob Burnett, who you mentioned, is well aware of this. And you know, we’ve had conversations where we’re saying, look,

Here’s what’s going to happen. The big pools are going to say to Coinbase and Gemini and whatever, we are going to give you this much space in our blocks over the next month. And we want this much fiat to do it. Right. And it’s not going to make any sense from the network’s perspective. These might all be zero sap per VBI. Right. So the ability to sell this stuff and to do it completely opaque in an opaque manner is only made possible by the fact that you can guarantee that many.

Stephan (56:55.108)
Gotcha, it’ll be out of band payment, yeah.

Bitcoin Mechanic (57:06.754)
blocks that get in the chain, right? If there’s thousands of people constructing block templates, whatever emerges here that supersedes the mempool as a mechanism for getting transactions into the blockchain is going to necessarily just be more transparent, right? So there’ll be some other protocol, all right, this is how you submit transactions. Rather than there’s an API where you submit a transaction to either Antpool or Eftapool or Foundry, which, you know, this is what mempools transaction accelerator will probably be using. Something of this nature, like rather than that,

You have just, oh, there’s thousands of people constructing templates. Like no one of them can offer me any guarantee that my transaction will get in the next eight weeks, right? Because you’re still splitting rewards. You’re just constructing templates that split rewards. So you can mine and get consistency of income, just like with a normal pool, but the actual template you construct, that might not get in for eight months or whatever, it doesn’t matter. You’re still getting your income, but you can’t make a guarantee to some out of band guy that wants to purchase your block space in your template.

that you’re actually going to be able to find anything within months. Right. So that market becomes less compelling. And it means that anyone purchasing block space out of band has to do it with a whole bunch of people at once rather than just one entity. So it decentralizes it. And this is definitely going to be a future we have to contend with. It’s so naive at the moment where we just go, what’s in the mempool? That’s probably what’s going to end up in the next block. The highest fees, there’ll be what end up there. That is very unlikely that in a world where block space is incredibly expensive.

that that’s just going to naturally continue the way it is. Like we know that the mempool is kind of doomed. It’s just that this current pool model is accelerating how doomed that is because stuff just ends up in a blockchain that no one knew about.

Stephan (58:44.024)
Yeah, interesting. Yeah, fascinating stuff. Now, I will say, Mempool.space is the sponsor of my show. They do have the Mempool Accelerator, which is going to be launching soon. But it’s still unclear exactly what happens with all this. It may be that there’s some big pools, and then there’s a whole bunch of people using Ocean. We don’t know exactly the way this plays out. And I think another interesting dynamic that we might see.

Bitcoin Mechanic (59:05.899)
Mm-hmm.

Stephan (59:14.004)
is this dynamic of people wanting to sort of outsource things or palm it off to sort of say, Oh, look, Mr. Govind, Oh, look, Mr. Regulator. I had no choice in whatever the transactions. I was just doing my SHA-256 hashing or I was just doing my, I’m just operating this pool and I don’t have power over what goes into the block template. So there’s sort of an interesting element there around decentralization that makes it harder for censorship to occur.

Let’s put it that way.

Bitcoin Mechanic (59:44.922)
Yeah, I mean, there’s a there’s an element of mining that sort of emerged where miners actively don’t want to refer to themselves as miners. It’s like the thing I was framing as a problem earlier is a solution to these guys. They’re like, I’m not a Bitcoin miner, I lease my hashrate to a mining pool and they comply with everything they’re asked to comply with. Like, and they do that on my behalf. So I don’t mind Bitcoin, I get paid to provide a hashing service to a someone that I think has something to do with Bitcoin. I don’t know.

don’t come at me officer. Like it’s really just like there’s an actual like emergent phenomenon of especially the larger miners that are actually encouraging this and benefit from it. So obviously, we don’t like that it’s bad for the what do you call it? It’s bad for the robustness of Bitcoin in general to have people that are operating at that scale anyway. So I mean, yesterday,

I’m going to say yesterday from the perspective of people watching this, Bob will have given a talk and he talks, he has these analogies for, you know, you have the rabbits and the wild horses and the elephants and he calls the elephants is something he refers to as you cannot ever, you cannot operate as an elephant without people knowing what you’re doing. You cannot hide, you cannot obscure your activity and you must do what you’re told to do as an elephant. Whereas a horse is small enough that it can be wild, right? It can operate freely or you know, and

the rabbits of the pleb miners and you can shoot one or shoot 10 of them, but there’s going to be a million more and you can’t control any of it. So really you just want to increase the scope of what the pleb miners are doing. You want the pleb miners to have as much sovereignty as a miner as possible. So to what you said before, I think the way the network would split up naturally, according to our calculations, around 40% of the hash rate is people you can call plebs, which is great, frankly. I didn’t think it was that good, but that is about what it is.

Stephan (01:01:22.724)
Right. Yeah.

Bitcoin Mechanic (01:01:37.534)
In my opinion, naturally all of them should come to us. We are better in every single way. It, with the exception, if you, if all you care about is consistency of income, FPPS pools are going to be able to provide that in theory. But in my opinion, you’re not getting what you’re supposed to be getting with regard to transaction fees. So it’s not about the 0% as opposed to the 2% or the two and a half percent or whatever you’re paying elsewhere. It’s about the fact that you’re going to be transparently getting all of the transaction fees you’re supposed to. And.

Real crude example, if someone goes along and pays 19 bitcoins in a transaction fee by mistake, that money is yours. You can give it back if you want, but we are not going to come along nanny state pool vibes and say, sorry, we’re giving that back to the guy that made the mistake. You’re never going to see it. That would have been yours. So as these mistakes happen, depending on how you want to do these things, you can either give them back. But that’s just a raw example of the increase in sovereignty.

these mistakes are going to happen, you’re going to make the money, you can give it back if you want, or you could just make more money. It’s totally up to you. But that’s a very crude example of how having an intermediary between you and Bitcoin can just mean less revenue. But there’s, you know, more important and more systemic is just the fact that FPPS is just impossible to verify whether you’re getting the correct transaction fees. Like my contention is that you’re just not. And with our pool, you’re going to get all that. So the 0% to me, I don’t talk about it that much, because it’s kind of small in comparison

just the fact that you’re getting more out of what Bitcoin itself is providing the person actually mining blocks. You’re just getting more of the split of that because it’s not hidden behind everything. So yeah, I think, I think it’s just more lucrative. The only disadvantage that might make people not want to come with us is if we just don’t hit that threshold, we’re just so small that we just never find blocks. That’s, that’s yeah. Yeah.

Stephan (01:03:15.277)
Right.

Stephan (01:03:24.784)
to sort of get over that initial hurdle to have a low enough variability, right? Because I incorrectly said before, there’s a long tail, but no, there’s not. There’s about 12 mining pools and there’s maybe five or six that are kind of really big, but I think maybe the idea as you’re getting at is this idea that you could have a long tail of real miners in this ocean context, right?

Bitcoin Mechanic (01:03:31.848)
bootstrapping.

Stephan (01:03:54.008)
lots of people using ocean. Um, but you know, to Bob’s analogy, and I’ve got, I’ve got a recent episode with Bob, so I’ll put that in the show, show links as well, but, uh, this model of how many rabbits, horses, and elephants are there. And it’s sort of like to preserve the decentralization of the network, you sort of want a healthy enough population of rabbits and horses. And so maybe this model of ocean can sort of make it feasible for more of those rabbits and horses to.

exist, be viable, be popular. And so we will put all the links in the show notes. So I believe it’s ocean.xyz. I will link to your Bitcoin magazine article. Any closing thoughts there, mechanic?

Bitcoin Mechanic (01:04:36.738)
Sure. So, I mean, I would really push home how beneficial it would be to smaller miners to switch. So they’re not going to get fleeced by the pools that don’t care enough about them to make personal offers and cheap, you know, bespoke deals for very big guys. They’re not going to be left subsidizing the big guys. This is great because it changes the landscape, right? If the big pools can no longer operate on a model where they get the benefit of all the small guys mining with them.

and then they use that to subsidize everything else. If they start having to charge the bigger guys more money, that would be great because then they’d have an incentive to switch too. Um, so yeah, it’s really just, it’s for people that let me, some people did mine with Peter pool. We didn’t bring that up. Peter pool was great. As far as I know, it hasn’t found a block in a very long time. I don’t think anyone’s using it anymore. It was, you know, people that are fed up with mining as it is, and they want to decentralize the thing, but unfortunately,

You can’t scale any sort of decentralized mining protocol. It’s way harder than scaling Bitcoin itself. Getting everyone to run nodes is doable. Getting everyone to run entire pool infrastructure as a miner, which is what you have to do with Peterpool. Every single miner has to be a pool, essentially. You have to verify everything everyone else is doing all the time. And every time a new person joins, it gets exponentially harder. Well, that’s Peterpool. It was…

But some people still used it, right? So my point is there are enthusiasts out there. There are people that are like, nope. Well, we already have. We already have people that have committed to mining with us. Well, that committed to mining with us at launch. It’s funny because I’m speaking blind now. From my perspective, doing this podcast, it’s in a few days, that launch. And for anyone watching this, it’s already happened. So I don’t know whether the whole network went, great, we finally have something that isn’t a joke of a pool and that’s transparent and disintermediated.

Stephan (01:06:02.096)
Maybe you can reactivate those people. Yeah.

Bitcoin Mechanic (01:06:26.558)
I hop over straight away or no one cares. Like who knows? I don’t know what’s going to happen. It’s really surreal doing this. But I, what I will say is I do think we’re going to meet the threshold very quickly where we can provide consistency of income and we get enough blocks. And at that point, we’re a no brainer for everyone, except people that just really want to say, I am not a Bitcoin miner. I provide a hashing service to this regulated entity and don’t, you know, I don’t know anything about this filthy cryptocurrency. Yeah.

Stephan (01:06:53.257)
Right, and maybe they want that for a particular reason. But yeah, okay. Well, I think that’s a great spot to finish up. Hope people check it out. And yeah, hope to chat again soon. Thanks for joining me, mechanic.

Bitcoin Mechanic (01:06:56.03)
Yeah, I get that, yeah.

Bitcoin Mechanic (01:07:04.03)
Yeah, no worries. Thanks for having me, man.