David Vorick, CEO of Nebulous, which operates Siacoin and a new subsidiary, Obelisk, describes what he’s discovered in his exploration of the mining industry, including why he’s decided that specialized chips like ASICs are preferable to generalized chips like GPUs, even if they tend to bring out mining centralization. He also describes Obelisk’s new service, Launchpad,which secures exclusive deals to create a custom proof-of-work algorithm for a coin and also the mining equipment for it, in exchange for being the only miner on the market at launch or for a period. He explains why he thinks proof of work is the only really viable type of consensus algorithm and doesn’t even see any other potentially workable ones on the horizon. Plus, he has some sharp criticisms of Bitmain and claims that several groups were secretly mining Monero, though he can’t reveal how he knows.
David Vorick: https://twitter.com/DavidVorick https://medium.com/@davidvorick
Siacoin: http://sia.tech
Blog.sia.tech
Obelisk: https://obelisk.tech
Blog.obelisk.tech
David on why Siacoin chose ASICs: https://medium.com/obelisk-blog/choosing-asics-for-sia-4b11695df051
David’s long post about the state of cryptocurrency mining: https://blog.sia.tech/the-state-of-cryptocurrency-mining-538004a37f9b
Announcement about Obelisk:
https://medium.com/obelisk-blog/introducing-obelisk-launchpad-b78756eaa74cZooko’s recap of his conversation with Jihan Wu, CEO of Bitmain: https://forum.z.cash/t/so-i-had-a-videochat-with-jihan-wu/29379
Bitmain’s tweets being transparent (account currently disabled): https://twitter.com/BITMAINtech/status/1001376036985028608
Bitmain’s blog post about being transparent: https://blog.bitmain.com/en/antiminer-z9-mini-shipments-experiment-radical-transparency/
Thank you to our sponsors!
Preciate: https://preciate.org/recognize/ https://www.blockchainwarehouse.com
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop into iTunes to give us a top rating or review that helps other listeners find the show.
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Laura Shin:
My guest today is David Vorick, CEO of Siacoin and now, Obelisk. Welcome, David.David Vorick:
Hey. Great to be here.
Laura Shin:
I want to spend the majority of the time talking about mining and your new ventures, but let’s first get your bio and talk about your first company. How did you get into Bitcoin?
David Vorick:
I was introduced to Bitcoin by a friend of mine in college back in 2011. I remember the price being at about a dollar and a half and unfortunately, I did not buy nor did I have much money to my name, but I was super fascinated by the concept and just got sucked into it. And then I sort of fell into the trap where I’m like, “Oh. The system looks so bad and looks so easy to improve.” So I actually spent much of my first two or three years trying to come up with ways to do Bitcoin better and sort of eventually conceding defeat and realizing that it’s actually a very well done system in that all the inefficiencies are actually necessary to how it works. And then I went on from there to make Siacoin which is a decentralized cloud storage platform. The idea was that we could take a lot of the same things that Bitcoin had done for money and do it for the cloud. So we wanted to make a way to put data onto the cloud without having to give up control to say a third party server. So we wanted you to be able to store your data on a cloud and also be fully in control of what’s happening to that data.
Laura Shin:
And when did you have that idea?
David Vorick:
So that started late 2013. We incorporated Nebulous, the company behind Sia in 2014 and we basically worked on it feverishly for about a year and we released the first version, the sort of alpha release of the Sia network in 2015.
Laura Shin:
And how did you come up with the idea? And also now that we have these competitors like Filecoin and Storj, how do you differentiate from those?
David Vorick:
Yeah. I think that I was just really interested in data and data sharing and file sharing, and I had a lot of files of my own that I wanted to store, and I just … It felt suboptimal or uncomfortable to use something like Dropbox, or Amazon, or Google Drive because they can see all your data and it just didn’t seem like the right way to do things. And there didn’t seem to be a good alternative so I thought why not, why not make the alternative. And I told myself it doesn’t seem that hard. In retrospect, it is very difficult but … Yeah. Now that we have competition, I think our key distinguisher has always been our determination to release things and to …
I guess two things. The first is that we’ve been completely uncompromising on the decentralization, so we’ve never had a hybrid, partially centralized, partially decentralized platform. It has always been a fully decentralized platform and that’s been super important to us because we didn’t want to depend on some feature that would be difficult to replace or upgrade later. And then the other thing is that we’ve been really determined always to push features out early and start getting user feedback early and prove from there, and so we’ve … We were the first decentralized cloud storage platform to launch. I think today, we’re the only fully launched, fully decentralized cloud storage platform. That’s been the case for three years and it’s just been a journey of continuously improving it, adding features that people view as critical and trying to make it a more full platform.
Laura Shin:
And you kind of maybe alluded to this earlier, but I was looking at the stats on the Siacoin website and saw that you don’t have quite 800 storage providers yet and there are 175 terabytes of used storage. That didn’t seem like a big number to me. Why hasn’t Siacoin seen more adoption yet?
David Vorick:
Yeah. That’s a good question. So I think the biggest reason is that we don’t support full backups and so while you can put your data in the cloud without losing control, today, the uploading machine is the single point of failure. And so if the machine that uploaded the data fails, then you lose all your data and there’s no easy way to recover it, but that’s what we are working on through the summer. We’ve already begun work and we have a eight-ish week roadmap development plan to remove that. When that happens, we think we’ll see more adoption. And then sort of right alongside it, we’re developing a file sharing feature which we also think will really stimulate adoption.
Laura Shin:
Last year, you announced you would be manufacturing mining equipment for Sia through a new company called Obelisk. Why did you decide to start manufacturing your own mining equipment?
David Vorick:
Yeah. So the biggest reason was that we saw Bitmain had cornered the market for Bitcoin, cornered the market for Litecoin and Dash, and they seemed to be on an unstoppable rampage, and we didn’t want the same thing to happen to Sia. We wanted there to be multiple manufacturers that were competitive and most of all, we wanted to make sure that nobody in particular had cornered the market. So at that point, we were super naïve to the hardware industry. It was our first time doing anything like that and we just sort of took the leap and went for it. We certainly did an enormous amount of research. We talked to many companies who had done it before including KNC, Butterfly Labs, to help get guidance and understand what’s necessary to put out a hardware product, but the big goal was really to learn more about the mining space and to make sure that Bitmain wasn’t the only player in the Sia ASIC world.
Laura Shin:
And at that point, what kind of equipment was being used to mine Siacoin?
David Vorick:
At that point, everything was completely GPU-mined. And so we figured if we can be first to market, any ASIC is going to be a big deal and it’s going to be minimally 100X better than GPUs. We, from the beginning, designed Sia to be an ASIC-friendly network. We’ve always believed that ASICs are inevitable and we wanted to make sure that Siacoin’s transition to ASICs was smooth and friendly and open and easy for many manufacturers to get involved.
Laura Shin:
Yeah. For listeners who don’t know the difference between ASICs and GPUs, can you explain that and then also explain why you chose ASICs and also then why the community gave you some heat for that decision?
David Vorick:
Yeah. So a GPU is a general purpose computational machine. Most people who have GPUs use them for video games, at least before cryptocurrency. And so what it means is that every cryptocurrency or most cryptocurrencies have different proof-of-work algorithms. And so you have … A GPU can typically do any of those different algorithms, but it’s inefficient because that flexibility to switch between algorithms just means that it has some extra features that it doesn’t need. An ASIC is highly specific and so all it can do is this one thing. And so in the case of the Sia network, all it can do is Blake2b which is our proof-of-work function. And so if we even make a tiny tweak to that proof-of-work function, the ASIC is completely broken and completely useless. While a GPU, you can tweak the GPU and the GPU can stay on the network. But when you make something that’s that incredibly focused on one task, it’s enormously more efficient. In the case of Blake2b, which is our proof-of-work function, it’s between 250 and 1,000 times as efficient. So $1,000 of ASIC hardware can outperform say $500,000 in GPU hardware on the Sia Network.
And so the reason that we chose … So some algorithms, some coin developers and coin communities prefer to choose algorithms that are difficult to make ASIC for. They want to be GPU-friendly and the reason is because anyone can go to the store and buy a GPU. Yeah. Every computer shop is going to have GPUs that they can sell. It’s pretty easy for someone to pick one up. An ASIC however is made by a single manufacturer, a small number of manufacturers. They don’t have shops on every street. You have to order it online from a specialty online store and a lot of times, these manufacturers are choosy with who they sell to or they put limits on it for the average person but they may go and sell 10,000 to their friends, and so this creates essentialization pressure and really … The world of ASIC doesn’t match the ideal vision for decentralized cryptocurrency mining, but the unfortunate reality and the reason we chose ASICs for Sia is that ASICs are inevitable. For any algorithm that you pick, someone is going to be able to create highly specialized hardware that’s dedicated to that algorithm and it’s going to be substantially faster than a GPU, so we believe that there’s no way to escape ASIC manufacturers in a proof-of-work coin and in a proof-of-work ecosystem.
And so we wanted to pick an algorithm that’s very easy to develop ASIC for that had a very low barrier to entry, that way there is a better chance that we have multiple manufacturers as opposed to just one. And even at the GPU level, we see there are only really two major GPU developers in the world or GPU companies in the world that’s AMD and Nvidia, and that’s because GPUs are enormously complex and highly specialized. And so there are only two companies that are at the scale to be able to do so competitively versus like Bitcoin ASICs, you have Silicon, and ASICMiner, and Bitmain, and [inaudible], and BitFury, and so you have a lot more manufacturers. And while there is one who is clearly ahead, at least there are five or six total versus the GPU market where there are only two total.
Laura Shin:
Interesting. And so I earlier did mention also that there was kind of a little bit of an uproar about this decision and I also wanted to note that at the beginning when I asked you about what distinguished Siacoin from your competitors, you did say your commitment to decentralization. However, I believe some of your users objected to this choice of ASICs because choosing ASICs does lend itself to some mining centralization. Is that correct? Why did you make that trade-off?
David Vorick:
Yup. We saw it as a long-term decentralization choice versus a short-term decentralization choice. Like I said, we think that no matter what algorithm we pick and no matter what strategy we pick, there’re going to be specialized miners and so the best thing that we can do in the long term is pick an algorithm that enables as many manufacturers as possible. Now, I think Monero has taken an interesting alternative approach which is that they believe more or less the same thing. They see ASIC as inevitable but they are trying to bid time. They think that they can use a bunch of temporary means to thwart ASIC and try and preserve short-term decentralization before eventually embracing ASIC in the long run. And so we don’t like that approach, we think it’s too heavy-handed of governance. However, it is an example of a coin that believes the same things we do, taking a different approach to trying to decentralize their mining.
Laura Shin:
Some coins also try to make their hashing algorithms ASIC resistant but you are skeptical of this as a strategy. Why?
David Vorick:
Because having worked closely with hardware developers, we’ve learned that the number of tricks hardware developers have available to them is far more. They’re far more rich and far more advanced than anybody in the software world or most people in the cryptocurrency world realize. And so most ASIC-resistant algorithms have been made by software developers who are trying to, I guess, kind of fool or stumble hardware developers, but the software developers don’t know the hardware world very well. They don’t understand what techniques hardware developers have and so they don’t realize that most of these ASIC-resistant algorithms actually have sometimes trivial workarounds or simple hardware implementations that are going to extremely outperform what a GPU can do and we actually saw this with Equihash. So Zcash was originally designed to be ASIC resistant. They used the Equihash algorithm. And while it worked for a while, we saw Bitmain come out with a miner that I think is 10X more energy efficient than GPUs and something like … If I remember correctly, something like 50 times as fast. And then Innosilicon just a month later, released a miner that was even 5X more energy efficient than the Bitmain miner and was even faster than the Bitmain miner. So what’s happened is this sort of prophecy that you can’t truly ever be ASIC resistant, someone will always get there, played out very well in the Zcash case.
Now, we’ve also seen in the past, other attempts to be ASIC resistant. Litecoin was originally meant to be ASIC resistant. They used some tricks that they thought would make it difficult for hardware developers to make ASICs but of course, that didn’t work. Litecoin has ASICs today and has had them for a long time. Dash is another example of a coin that was originally ASIC resistant but now is an ASIC-mined coin because hardware developers figured out how to make specialized hardware for the Dash mining algorithm. And so this is a trend that if you talk to hardware developers, they basically confirm, no matter what you do, there’s always some way, some trade-off we can make that when we make specific hardware for an algorithm, it will be substantially faster. And so the hardware devs that I’ve talked to and that I’ve worked with have said they don’t believe that ASIC resistance is possible just based on the nature of the work. They don’t see how you could ever make an algorithm that is equally performative on a general purpose hardware like a GPU or a CPU as it is on an ASIC.
Laura Shin:
You did write however that Ethash, which I guess is the Ethereum hashing algorithm was the most ASIC-resistant algorithm you’ve seen. How did they do that?
David Vorick:
Yup. So the tricky thing about Ethash from a hardware development perspective is that it’s basically a bunch of random reads to memory. And as it were, memory is actually already pretty optimized around doing low latency random reads, so … The Equihash algorithm ended up being pretty close to what specialized hardware … In this case, DRAM is already doing and DRAM is widely available. And so that made it more difficult to break away and make specialized hardware but as we’ve seen from the Bitmain miner, you can do it. You can make a specialized hardware for Ethash and it will outperform GPUs.
There’s another algorithm that got released recently called [Progpal???]. It’s still under development but they basically took a new approach to making an ASIC-resistant algorithm. So these were hardware people who took a GPU and they basically disassembled all the parts of it and they made an algorithm that requires you to use as many parts of the GPU as possible. And so these hardware devs still openly admit that there are improvements that an ASIC could make over a GPU on this algorithm. They said, “We can’t do it perfectly but this is going to be the absolute best attempt that you can get and we think it’s going to be close enough that it’s not going to matter within a factor of two or a factor of five as opposed to being within a factor of a thousand.”
Laura Shin:
I want to go back to the blog post that you wrote announcing Obelisk. You mentioned that you discovered that mining centralization in Ethereum was even worse than it was in Bitcoin. What did you uncover in there and do you know if that situation persists today?
David Vorick:
So I don’t know if that’s the exact wording, but mining centralization in GPU world, basically just like with ASIC, you have these large GPU farms that set up. They have access to hardware manufacturers. They can buy GPUs at rates much cheaper than a consumer can afford. And from what we can tell, the vast majority of Ethereum mining is done on these giant farms, not at users’ homes and so it’s still not decentralized. And so even if you get to go with general purpose hardware instead of ASICs, you can’t defeat the economies of scale that just govern the mining industry. People who run bigger farms, run bigger operations and have better connections to the hardware world are going to get lower prices, and are going to have more efficient mining, and they are going to be able to push the difficulty up to a point that it doesn’t make sense for consumers or home users to mine these algorithms. I don’t know if I could say that it’s worse than Bitcoin, but I can definitely say that it’s the same progression that we saw in Bitcoin.
And then even beyond that, we don’t … I don’t know if we’ve seen it yet but if someone like Nvidia or AMD were to take their own hardware and start mining on Ethereum, they would be able to do so at cost. And the margins on GPUs are very high, especially compared to the Bitcoin ASIC industry where most ASIC manufacturers are selling the miners at, as far as hardware is concerned, relatively low margins. An Nvidia GPU or an AMD GPU is sold at high margins. If Nvidia were to decide to mine, they could get those GPUs for much cheaper than anyone else can and they would have a substantial advantage over the entire rest of the ecosystem in mining and so you would see heavy centralization around the manufacture, that’s the way we already have. The thing is I don’t think at this point, GPU-mined cryptocurrencies are at the point where they’ve really gotten Nvidia’s attention. It’s still a relatively small part of Nvidia’s revenue and so they aren’t making moves that hold, but I think that if it were to continue to grow and prove to be a stable source of revenue, we would see an AMD or an Intel or Nvidia move in and have a substantial advantage over everyone else.
Laura Shin:
That seems so counterintuitive to me that the margins are higher on the GPUs than on the specialized hardware. Why is that?
David Vorick:
That’s because it is very difficult to make a competitive or a highly efficient GPU. You’re talking billions of dollars of development effort in research. Because it’s so difficult to make a competitive GPU, it’s basically Nvidia and AMD in a price war, dueling each other and so they can distinguish on features instead of on price, and so there are ways that they can continue to sell chips without undercutting each other on price heavily. Now, and something like Bitcoin mining with ASICs, it takes a lot less starting effort. We estimate the order of … If you’re going with TSMC on the order of $25 million to $30 million to start an ASIC company and while you’re not going to be at the efficiencies of Bitmain, you’re going to be much closer. Your SHA-256 ASIC is going to be much closer to what Bitmain can do than what a GPU startup is going to be, to what Nvidia can do. And so because that gap is narrower, if Bitmain prices their hardware are too high, startups like Obelisk can come in and make hardware and sort of chew at their margins. And so because the barrier to entry to the industry is a lot lower, we see that the margins are also just necessarily a lot lower.
Laura Shin:
Interesting. I also want to ask you about what happened this past winter when Bitmain announced Antminer A3, which was a Siacoin miner, and that caused some consternation in your community and talk of a fork that would render the A3s unable to mine Siacoin efficiently. You ultimately decided against that kind of fork and you even wrote this blog post that announced your decision and it ended by saying that you welcomed Bitmain’s customers. So why did you go that route?
David Vorick:
Yeah. So I think that initially, we saw the A3 as basically an attack on the network. We had a big community effort to produce ASICs for the network and sort of protect the network as a community. And so a large fraction of the most involved people in this high ecosystem were heavily financially invested into Obelisk and so to … Basically, when Bitmain came to market and threatened that, it basically soured and disrupted and turned off a large portion of the Sia ecosystem and we did lose a lot of users to the Bitmain announcement. A lot of people have been very unhappy ever since. And so I think if we had premeditated, if we had planned ahead a little bit more and said what happens if Bitmain shows up in January, we would have as a community been coherently focused around the idea of forking to get rid of Bitmain and to protect Obelisk since so much of the community was so invested into Obelisk. Unfortunately, we didn’t have this planning and foresight and so when Bitmain came to market, there was this big confusion about what should we do, what’s the right thing to do, is it greedy to fork and protect Obelisk, is it … If we do fork and give Obelisk a software-based mode or a fork-based exclusivity, does that mean that Sia is centralized under Nebulous?
And I think there were plenty of reasons to argue that it’s the right thing to do and I think that’s … If we had been together as a community in making that decision, I think it was the right decision to make. But we had several prominent community members come forward and say, “If you fork, we will leave, we’ll lose faith in Sia and we’ll never come back.” And that spoke volumes to us and we realized that we were stuck with this. If you don’t fork, you’re going to lose a lot of community members who are angry and upset that they lost money. If you do fork, sort of the ethical polish that Sia has always had is threatened and people may think that Sia really is just a centralized coin and that the decentralization motto and everything is just for show and it’s just marketing, it’s not how Sia really is. And so we decide in the moment that because the community was split and because it was difficult to fight this argument of greed and difficult to dissuade the accusations or disprove the accusations that we were acting purely out of greed for ourselves, we decided not to go through with it. We decided we would rather deal with Bitmain and have the A3s on the market and just sort of embrace the situation.
Laura Shin:
We’re going to discuss more about Obelisk and also its need service, Launchpad but first, I’d like to take a quick break to tell you about our fabulous sponsors.
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Laura Shin:
I’m speaking with David Vorick of Siacoin and Obelisk. It sounds like this controversy that happened in the winter when Bitmain announced its A3 miners might have informed your new service, Launchpad, and the way it’s designed. I’m going to describe it briefly, but you can feel free to correct me or explain it further. It seems like you guys designed both the custom proof-of-work algorithm as well as the ASIC hardware that works in it algorithm. Is that correct and was it influenced by what happened with the A3s?
David Vorick:
Yes. So you’re correct on all accounts. What happened with the A3s was that you had this community feel, this decentralized coin, this thing that people were very proud of, then Bitmain just kind of came in and soured everything by being the dominant manufacturer. We’ve seen this … This happened to Dash. It happened with Litecoin. We’ve even seen it repeated. Innosilicon’s done it to Zcash and to Decred. And so we think that there’s a … Today, you’re basically … Proof-of-work coins are basically stuck with the situation where whether or not you embrace ASICs, at some point, ASICs are going to be on your network and then basically whoever gets there first and whoever’s first to market with an ASIC gets to call the shots for a while and gets to control the hash rate, gets all the coin issuance. If they want, can perform certain types of attacks. And so the transition as most coins have seen has been very brutal to go from GPUs to ASICs.
So with Launchpad, if we are developing a algorithm behind the scenes and ASIC hardware concurrently, we have a strong guarantee because of the secrecy that Obelisk is going to be first to market. And then, of course, beyond just Obelisk being first to market, we have legal agreements with the developers and sort of agreements and contracts with the community of what we’re going to do with this first to market power. Especially because it’s been granted to us sort of exclusively, we can make sure that when the transition from GPUs to ASICs happens or when the coin launches, we can just launch the coin with ASICs out of the gate. We can make sure that those ASICs are owned by the community and those ASICs are decentralized as opposed to being centralized under a single manufacturer. And then other things that we can do is we can make these, the algorithm, ASIC friendly. We can make it easy for other manufacturers to get started and we can even open source the chip designs so that all really another manufacturer has to do is take the chip designs and do another tapeout. So-
Laura Shin:
Wait. I actually just want to back up because you just said that you can help ensure that the coin is not centralized under a single manufacturer but it sounds like that’s exactly what will happen.
David Vorick:
Yes. So the key difference there between what say Obelisk is going to do and what say Innosilicon or Bitmain might do is that Obelisk is under a legal contract to distribute the hardware a certain way and will be very transparent about how the hardware is being owned and how it’s being distributed. And then as a second step, Obelisk will also make sure that when other manufacturers want to get started, they have a lot of guides to lower the barriers and make it easy for other manufacturers to come and compete with Obelisk. So yes, it is still a centralized launch but it is a much smoother and more community-oriented launch, and it is a launch that is geared around getting other ASIC manufacturers ramped up in the future as opposed to being a launch centered around owning the market and making sure there’s only one ASIC manufacturer ever on that coin.
Laura Shin:
Is it a risk to have one company create both the proof-of-work algorithm as well as the ASIC hardware? Could a rogue employee game that in some fashion? And in general, what are the risks that people would run in trusting one company to do both things?
David Vorick:
Yup. So I would argue that the risks are at the very worst, they’re equal to not using the Launchpad service. Because if you don’t have the Launchpad service, you basically have this whoever gets first to market, whoever makes the best chip, whoever plays most aggressively is the person who owns the coin and so you have this completely, entirely rogue element. So either you go in a situation where you’re going to get a first to market and have no control at all or you have this trusted situation where you are trusting a manufacturer. At the worst case, they could go rogue which is what you have without it. In the best case, this entity with a reputation can help you get off to a smooth start, help you get off to a coached start.
Laura Shin:
And also with the Obelisk, you’re focusing on proof-of-work coins. What do you think of other non-proof-of-work consensus algorithms like proof-of-stake or hybrid proof-of-work, proof-of-stake models or even something newer like threshold relay and Dfinity?
David Vorick:
Yup. So we both at Sia and at Obelisk believe pretty strongly that proof-of-work is really the only really strong method of achieving decentralization and achieving decentralized consensus specifically. And so hybrid models like say the Decred model, we’re in support of but that’s because … The hybrid model works because it has this fundamental tether using proof-of-work that gets it off the ground. So other models like proof of stake … And I’m actually not familiar with the Dfinity method you brought up with but generally speaking, when getting scrutinized or when going under peer review, these non-proof-of-work models have been shown to have a lot of issues.
Laura Shin:
I would be interested to know what you think of it when you learn more about it because they use a random number generator apparently to decide who will add the next block and it’s guaranteed to be truly random, not like … Because I said to the founder, I was like, “Wait. That seems like something we’ve had for forever.” And he was like, “Oh, no, no, no, no. For anything where you think you’re getting random numbers like a lottery or whatever, there’s an algorithm. It’s not truly random.” So in the end with threshold relay, what you end up with is something similar to proof-of-work in that the amount of mining equipment that you have on the network or the percentage you have I guess you would say of the total network that, over time, you would end up with a similar proportional amount of coins but it’s not as electricity intensive. There are so many coins that are moving away from proof-of-work to things like proof-of-stake, so do you worry about a broader industry shift and how that might affect the business prospects for Obelisk?
David Vorick:
Having been on the forefront of consensus research for a while, especially starting 2013, I feel fairly confident that it’s not a big risk. I feel confident that proof-of-work is going to be around for a long time. I think Ethereum for example has experienced a lot more trouble getting proof-of-stake off the ground than they were expecting initially. They had a setback there. Their [power time bombed ???] or whatever. And I think that these alternate methods that have come through … And in 2013, sort of the Bitcoin core community got a core understanding of the things that really don’t work in these different models. And nothing that we’ve seen in the past four years or five years has challenged or has made it look like there’s something different than these core issues, and so I don’t think that there’s anything on the near horizon and probably not even the distant horizon which would supplant proof-of-work or offers similar security properties to proof-of-work. I think all alternative systems make different assumptions, assumptions that I would challenge as being less secure or weaker than what proof-of-work can do.
Laura Shin:
Let’s talk about Bitmain. This is I guess the largest manufacturer of cryptocurrency mining equipment in the world and it runs some of the biggest mining pools. And last year, it had $2.5 billion in revenue I believe. How do you compete against Bitmain?
David Vorick:
Yeah. So that’s a great question and I think that it’s something that’s not easy. As I pointed out in my blog post, there’s these economies of scale where if you’re throwing $1 billion at a hardware problem versus someone throwing say even $100 million at a hardware problem, the billion dollars is going to have a lot more room for optimization and a lot more room for economies of scale and they’re going to be able to produce substantially more than 10 times the hardware for 10 times the price, and that’s just how the hardware industry works, and that’s just how hardware efficiencies work. So I think that you’re certainly right to call out Bitmain as a very challenging opponent.
And I think one of the key advantages that we may have is right now the industry, the silicon industry is supply shocked because the 7 nanometers have been late and so companies like Apple, Nvidia and AMD are buying up all the 7 nanometers supply. Bitmain’s big but they’re not as big as Apple. And so if Bitmain and Apple get into a bidding war, Apple wins. And so at least in the near term, I think that that provides one gap. But another gap that really helps is that the SHA-256 algorithm, the Bitcoin algorithm specifically is so simple that all the optimizations that Bitmain figures out, a lot of them end up being easy to replicate from a lower scale. So I think that it will be an uphill battle for sure, but I also think that there are … I think it’s a battle that can be won, that we can see multiple players in this space. 7, 8, even 10 plus players in the space who make hardware that is approaching what Bitmain is capable of and is able to remain competitive.
Laura Shin:
You’ve written a few times that you think Bitmain is a bad actor. Describe what happened when you tried to manufacture your equipment in China.
David Vorick:
Yup. So this I want to be very clear is something we don’t have any proof on and so there could be any number of reasons that this happened and so this is not a accusation at Bitmain. However, we were warned before we started manufacturing, not to do anything in China because Bitmain would mess with our supply chain. This is a warning that I received from multiple different advisors telling us to stay out of China. And a lot of our manufacturers, a lot of our engineers who helped us bring the chip together, bring the unit together, the mining rig together, thought this seemed kind of silly so opted to go to China anyway. So originally, we were using two services in China. One was SMIC, was a Chinese foundry. So we’re going to use a Chinese foundry to make our chips. The other was called DataED, was actually an American manufacturer that did the bulk of its manufacturing in Shenzhen, in China. Both of these supply chain components actually fell through and they fell through late.
So when SMIC told us that they couldn’t work with us, we lost probably two months of development time because the chip was already almost complete when we got this news, so we had to shift to a new foundry that cost us a lot of development money and it cost us a lot of development time. Then, same thing, when DataED told us that they were unwilling to work with us anymore, we had to basically scramble at the last minute to find new manufacturers. And since we lost out on the China pricing, this also cost us several million dollars. We ended up having to pay the price of American manufacturing which is substantially higher. We didn’t have time to work with say Singapore or Mexico just because they dropped us without giving us enough lead time to find a replacement except for people that we could go drive to every week to get things moving quickly. This is just an anecdote. There’s never any sort of trail to indicate that Bitmain was involved in any way, but we do have two places where Chinese manufacturers dropped us just like we were warned would happen.
Laura Shin:
And did they give any reason why they were dropping you?
David Vorick:
So we don’t have a good reason from either of them. Admittedly, I was not directly involved in the conversation with SMIC. Our chip devs were handling that, so I don’t know the full reason that this happened. With our manufacturers, I was more directly involved and our engineers described their excuse as unprofessional, and it didn’t make sense, and it wasn’t reasonable, and it’s not what you would expect from a manufacturer. But other than that, we don’t have a very strong reason.
Laura Shin:
Some people think that Bitmain was secretly mining coins and you referenced this a little bit that they were doing that with new equipment before selling the equipment to customers. However, Zooko had this conversation with Jihan and then he … And Jihan Wu is the CEO of Bitmain. And he published a recap of the conversation. Apparently, he asked Jihan whether or not Bitmain had been doing this secretly, mining the coins before selling the equipment and he said no. So have you looked into that at all, and did you read their conversation, and what were your thoughts on what they said?
David Vorick:
I did read the conversation. It doesn’t match what I know. The things that Jihan claimed don’t match the things that I’ve heard from other people associated with Bitmain.
Laura Shin:
Wait. What specific things did he claim that don’t match what you know?
David Vorick:
Yeah. So one of the things that he claimed was that the secret Monero miners were not Bitmain and that he didn’t know anything about it, he hadn’t had time to look into it. I can confirm that we believe that the secret Monero miners were not Bitmain, were someone else. However, we also believe that Bitmain was heavily involved and that Jihan absolutely knew what was going on and could have named the people who were doing the secret Monero mining. So this is one thing where … Again, we’re not a hundred percent sure but we’re very confident that Bitmain as a company, if not Jihan himself, was involved in some way with the secret Monero miners. The other things is that-
Laura Shin:
And do you have any sense of how they were involved?
David Vorick:
I don’t think I’m able to share.
Laura Shin:
Okay. So keep going. The other thing.
David Vorick:
The other thing that we were told from people close to Bitmain … And again, this is not confirmed but we were told that Bitmain had been mining Siacoin since November. And of course, they didn’t announce their miner to the Sia public until … Yeah, to the public until January, middle of January. However, as soon as they announced the machines were shipping within 10 days, it was clear that they had been making them at least for several months. And we were informed, again, by people close to Bitmain that Bitmain had been mining since November and this is apparently, at least as far as rumors go, something that’s very common within Bitmain where Bitmain will mine for several months. The rumor goes three to four months usually before releasing hardware. A complicating factor is that we know that Bitmain far and away is not the only person involved with secret mining and we know that there are several efforts and several groups that participate in secret mining. And so though we can point at certain trends and say we’re pretty confident that there’s secret mining happening here, it’s difficult to figure out which group. And in many of the cases, it’s not Bitmain, it’s someone else who’s doing the secret mining.
Laura Shin:
And are those groups also manufacturing their own equipment or how can they be secret mining?
David Vorick:
We believe that some of them are manufacturing their own equipment or using help from groups like GUC. We believe that some of them may be contracting say either Bitmain or Baikal . We believe Innosilicon does a lot of their own mining. Although, again, we don’t have any definitive proof. It is very difficult, secretive space to navigate but we think that most secret mining rigs are manufactured by known names even if the groups funding the secret mining and the manufacturing process are not the known manufacturers.
Laura Shin:
Interesting. You did write earlier that mining manufacturers sell mining equipment instead of keeping it for themselves only if they think they can get more money for it by selling it than by basically printing their own money with the machine themselves. Is that what you meant when you say that?
David Vorick:
No, that’s actually not what I meant. I was more pointing at the public mining. And say Bitcoin for example, why would a company like Bitmain ever sell a money printing machine for less money than it’s going to print? And I think that the clean answer is that they wouldn’t and that they don’t. They will only ever price a mining rig that they are selling at price that is above what they believe they could make by mining it themselves.
Laura Shin:
Oh, right. Okay. But then to draw that conclusion, what do you think this means for whether or not the average person can make money off of mining? Can they or what does this mean for retail buyers?
David Vorick:
Yup. So I think that it means that retail buyers cannot make money off of mining and I think that’s a luxury which is going to disappear. Now, it may make sense for Bitmain to sell hardware to a professional mining farm if that mining farm has access to say one cent electricity and the best Bitmain’s able to do at scale is say three or four cents, because really cheap electricity is difficult to do at scale. Then, there may be some reason there where that specialized mining facility can make more money than Bitmain can, but you’re not going to see that in a retail environment. You don’t see retail people with one cent electricity. Typically, it’s closer to 10 or 15 cents, which Bitmain can do way better than.
And in GPUs, I think in the long run, any GPU mining is going to go the same way because eventually, you’re going to catch the attention of Nvidia. If the ecosystem grows enough, Nvidia is going to start mining themselves and of course, it’s the same thing. Why would Nvidia sell a GPU for $800 if they knew they could make $1,000 by keeping it? And they won’t. They don’t today because cryptocurrency isn’t on their radar or at least they aren’t willing to take a risk on holding that type of inventory and mining themselves. But if the industry is stable and proves to be a long-term stable investment, I think you will see companies like Nvidia getting involved and mining. Personally, again, that means that retail miners aren’t going to be able to make a profit.
Laura Shin:
To go back to this conversation with Zooko, after Jihan and Zooko spoke, Bitmain wrote a blog post and also some tweets saying that it would now try to conduct its business in a more transparent manner and so they tweeted out updates on the shipment of the Zcash miners. What did you think of this move?
David Vorick:
So at this time, I think we should view it as purely a PR stunt. I actually haven’t seen the tweets they put out, so I’m not sure. I think that the information is useless unless they also disclose the exact number that they have queued for manufacturing. I don’t know if they disclosed that number or not but I think that if they didn’t, you can point to that as being non-transparent and as being an illegitimate attempt at transparency. Even if they did provide that information, I would question whether that’s a long-term commitment that they’re making or it’s something that they’re doing to clean up their image in the short term, especially if they’re eyeing say an IPO. They want to have a good reputation going into the IPO as something you can trust in the long term. Because Bitmain’s DNA really has seen to be about short-term profit and about not caring about screwing up the rest of the ecosystem or really digging into the rest of the ecosystem. If that’s what makes them money, that’s what they’re going to do. And so I wouldn’t trust that they’ve changed that DNA without seeing substantial more long-term and heavy-handed commitments to transparency. So maybe they have changed but I would definitely wait longer to believe it.
Laura Shin:
Have you ever spoken with Jihan or met him in person?
David Vorick:
I have not.
Laura Shin:
Okay. So you didn’t reach out to ask any questions about anything.
David Vorick:
We did reach out when they announced the Sia miner and we got put in touch with a lower level marketing person and basically, they more or less stonewalled us, trying to get basically all of our customer information. They wanted to know the name and address of every single one of our customers. They claimed so that they could give our customers coupons but I don’t think under American law, it’s even legal for us to do that. So we at least had one interaction that felt halfhearted or just abusive even. Beyond that, we haven’t made too many attempts since January to reach out to Bitmain.
Laura Shin:
Hi, guys. Laura cutting in here with some notes recorded separately from my interview with David. As I mentioned, I asked Jihan Wu, the CEO of Bitmain, about the various allegations David made on the show. About whether or not Bitmain was involved in Obelisk’s foundry and manufacturer, SMIC and DataED, halting their work with Obelisk late in the process, Jihan said they didn’t influence their manufacturers to work or not work with Obelisk, that the manufacturing business in Shenzhen is very competitive with numerous manufacturers and so how can Bitmain control all of them. He also said Obelisk was blaming Bitmain for Obelisk’s supply chain management failures and that this was irresponsible. About the allegation that Bitmain was involved in secret Monero mining, Jihan said no that Bitmain was not, “David accuses Bitmain without any evidence.” About manufacturing Siacoin miners, Jihan says that it was Bitmain who approached David through a consultant and that they had actually delayed the release to have a face-to-face discussion with him. Jihan said, “After I confirmed that David had a hostile intention to change the proof-of-work algorithm of Siacoin …” Jihan said Bitmain decided to release the A3 miner.
Laura Shin:
About asking for the names and addresses of the Obelisk customers, Jihan responded, “Oh. This is so manipulative. We provided several options when we said that we can help. We thought we should take responsibility to help their preorder customers. We gave them several options.” Here, I’ll paraphrase the options. One, Bitmain issues coupons to Obelisk customers. Two, Bitmain ships its A3 miners to Obelisk customers with those customers’ consent. Three, Bitmain ships all the miners to Obelisk and Obelisk can reship the miners so their customers’ information can be protected. And then Jihan said, “However, they just refused. They refused to work with us in any way.” About whether Bitmain was mining Siacoin before announcing the miners, the A3 miners, he said that they didn’t do large scale industrial mining on Siacoin, only testing. He also said stealth mining wouldn’t work at a large company like Bitmain because it would require more than 100 employees, whereas a smaller operation like Obelisk’s could more easily do it.
Finally, about David saying he didn’t believe transparency from Bitmain would be useful unless Bitmain released the number of units that had queue to manufacture, Jihan responded that they wouldn’t release such numbers unless every competitor released the same number. Overall, Jihan said, “We felt he was in a seriously manipulated mindset against us and we decided to release miners without discussion with him anymore. He needs to verify the information he gets and make educated decisions.” Now, back to the rest of my interview with David.
Laura Shin:
Speaking of miners, we have been talking a lot about Bitmain because they’re the big fish, but you also wrote a blog post that talked about another miner. And I don’t know how to pronounce this. Halong I think is the name? And they created a Decred miner that they sold out of but then later you apparently discovered that 50% of the mining rewards in Decred were going to an address associated with Halong. So how do you think that happened and what do you think it says about how we can potentially curb the power that mining manufacturers have?
David Vorick:
Yup. So following the blog post, Halong reached out to me and they insisted stubbornly that that wasn’t their address and that they weren’t mining 60% of the Decred hash rate, which after further investigation, I now believe that it’s actually Innosilicon who owned the hash rate. We did see 60% of the hash rate going to a single address. At this time, we believe that address is Innosilicon. However, we are not a hundred percent certain, so I may have made that claim too boldly on my blog post and I’ve been meaning to go back and edit it.
However, it’s nonetheless the case that whether it’s Halong or Innosilicon or it’s a third party, someone seemingly had 60% of the hash rate and that … This is an issue and it’s one of the big reasons that we wanted to create Launchpad. Because it’s if you don’t have a controlled breakout with ASICs, you end up in a situation where you are vulnerable to whoever getting there first deciding to own 60% of the hash rate. If they start to enforce say a soft fork that only allows their mining hardware to be effective on the network, that could permanently block all other hash rate from the network unless the network does a hard fork. And so Launchpad is the best that we know how to do in solving the first miner to market problem. But we’ve seen consistently that whoever gets first to market for mining hardware for cryptocurrency, the cryptocurrency community tends to be incredibly unhappy about that situation and there tends to be a lot of negative side effects, and so Launchpad is our best attempt at remedying that. Though as you pointed out, it does have its own trust issues and it is sort of centralized beginning and so it’s an incomplete solution but it’s the best we know how to do.
Laura Shin:
And so far, it’s going to be Siacoin and Decred that you are creating mining equipment for. What else is on the roadmap?
David Vorick:
Yup. So we have two projects that have been commissioned that we can’t talk about, but Obelisk is working on two additional projects. And then beyond that, we are currently fundraising to make a Bitcoin miner. The amount of money that we need is fairly large so it’s currently looking like we’re not going to get there, but we do have our sights set on if not in 2019, then maybe in 2020, making a Bitcoin miner.
Laura Shin:
And will you be continuing to manufacture all your mining equipment in the US?
David Vorick:
At least for the time being, it looks like we will be staying in the US for manufacturing or maybe going to other parts of North America such as Mexico.
Laura Shin:
How low will the Bitcoin price have to go for us to see a significant shutdown of facilities?
David Vorick:
Based on our research, I think that if the Bitcoin price stayed below $5,000 for a substantial amount of time, you would start to see … You would see the hash rates stop growing and so you’d stop seeing new mining hardware being purchased. If it went below $3,500, I think you’d start to see big shutdowns of mining equipment.
Laura Shin:
Interesting. So we’ve spent the majority of the episode talking about mining but I also wanted to ask you about something that you mentioned recently which is that you’re working on a scaling solution called Microchains. Can you give us a brief description of what this is and how it works?
David Vorick:
It’s more or less a generalization of just what we already have with altcoins and the Lightning Network. So what I’d observed is that Bitcoin’s stuck at say three transactions per second, Litecoin’s stuck at maybe five or eight. Each individual blockchain has a pretty limited throughput for what they can achieve but with the Lightning Network, you can allow people … People on the Litecoin blockchain can transact trustlessly with people on the Bitcoin blockchain over Lightning and neither user needs to have the other chain. And so when you expand this to a very broad ecosystem, you can get an ecosystem of say 100 or why not blow it up even more, make it 100,000 or 100 million blockchains where a user only needs to be on this one tiny chain that’s very easy to run a full node on, but through things like the Lightning Network, they’re able to transact trustlessly with any other user on the network.
So when you take that approach and you take the approach of making a ton of really tiny chains as opposed to a small number of really big chains, a lot of interesting game theory happens. And so Microchains, when I release the blog post that I’ve been working on, will explore a lot of the game theory that happens. But it’s something that I currently think might be a viable way to bring heavy scalability to the ecosystem and also bring about more mining decentralization. I think there are some mining advantages to an ecosystem like this.
Laura Shin:
Well, I look forward to reading it when it comes out. Where can people learn more about you, Siacoin and Obelisk?
David Vorick:
I think the best place is probably blog.sia.tech and then Obelisk has a parallel blog at blog.obelisk.tech.
Laura Shin:
Great. Well, thanks for coming on Unchained.
David Vorick:
Thanks for having me.
Laura Shin:
Thanks so much for joining us today. To learn more about David, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter or LinkedIn. Unchained is produced by me, Laura Shin, with help from Elaine Zelby, Fractal Recording, Jenny Josephson, Rahul Singireddy and Daniel Nuss. Thanks for listening.
