[00:01:34] Preston Pysh: So I want to start off just giving people a little bit of a background on you. So you were the Chief Technology Officer and executive Vice President of product, an executive vice president of international markets for Gateway.

[00:01:47] Preston Pysh: This is back in the day when Gateway, you know, back in the nineties I forget when they hit this market cap, but I looked up that their market cap got as high as twenty-four billion for the company. And this is a major. I had a Gateway back in the college days. And you were a major executive in this company, so you’ve done product development at a very high level.

[00:02:11] Preston Pysh: And I guess my question for you is, starting off there with that background, when and how did you come across Bitcoin and what was the initial take coming out of this hardcore tech background? What was your initial take when you started hearing about it? 

[00:02:27] Bob Burnett: By the way, thank you for remembering for the older members of the audience.

[00:02:31] Bob Burnett: Hopefully you remember well. ’cause we were quite successful. And not to pat myself on the back and it was obviously a massive team. Yeah. I was part of it. As you said we had about 25,000 employees at one point. We had 400 retail stores. We had 10 billion in revenue. We were making about 10 million pieces a year.

[00:02:50] Bob Burnett: And it’s almost hard to imagine now when I look back at it, what I went through yeah. Like it’s almost like that was a different person. But it was really a magical time. And it leads a little bit to the question you asked me, which was how I got to Bitcoin, because I’ll be honest, that I feel like when I left that industry, which was in 2004, I had spent about 20 years there, I got a little lost.

[00:03:16] Bob Burnett: I got to almost say I was like a little lost. Not in some major way. But just kinda wandering what’s my purpose? ’cause I had been through this thing that was just so big. Like you said, it was a behemoth. I woke up every day with this purpose and we were, my background goes all the way back to the mid-eighties and my early PC development days, so right at the cost.

[00:03:36] Bob Burnett: And so I didn’t have something that exciting, and so life was just bland. But anyway, in 2017, one night I got a phone call. I always give my wife credit for this. It was nine o’clock at night. My phone rang. It was a Seattle phone number. I did not recognize the phone number and I wasn’t gonna answer it.

[00:03:57] Bob Burnett: Probably most people don’t want to answer, right? And my wife said, answer it. I don’t want to, she said, answer it. So I did it. Turned out it was an old Gateway acquaintance and he said, Bob, I’m starting a company. I raised a bunch of money. I need 300. A theory of mining servers. Set it up, turning into 800, a theory of mining servers a little later.

[00:04:20] Bob Burnett: As fast as I can. I can’t get the Nvidia chips, I can’t get anybody to design something professionally. Can you do that? And I’ll make that part of the story short. I didn’t know much about cryptocurrency or Bitcoin or any of those things at that time, but I was a computer guy and I just looked at it as a computer guy and ended up saying yes.

[00:04:42] Bob Burnett: I started a company which we now know as Barefoot Mining to build those, and it was about, ended up being about a $6 million order. So I started a company to fulfill that, which you’re pretty lucky, right? To get a $6 million order. That’s your first Yeah. As your first PO. But I looked at it as a computer guy and I had contacts along with Keith Thomas, who’s the president at Barefoot Along with me.

[00:05:05] Bob Burnett: We’re both ex gateway people. A little story now that Nvidia is what eclipsing Amazon and Market Cap is when they were a startup trying to find their first customer. The very first customer of Nvidia was Gateway. We were the first ones to put their chip on a motherboard. Keith was the head of desktop engineering working for me and who works for me now and is part of our team.

[00:05:28] Bob Burnett: So we were integral to that little start for Nvidia at that time. 

[00:05:32] Preston Pysh: That would’ve been huge risk. That would’ve been huge risk for you guys to incorporate this Nvidia chip into the hardware. Like how mu I’m cur, like I love production. I love talking about going through because there’s a lot of risk, especially when you’re dealing with hardware running a new chip like that.

[00:05:50] Preston Pysh: Walk us through more for my own curiosity. That risk profile that you were looking at putting in this chip, was it done on other, you said the Gateway is the very first company to do this? Yes. What type of purchase order? How many thousands of units and like how are you guys going through the risk of that?

[00:06:09] Bob Burnett: I can’t remember the specifics, but it was probably given where we were at that time, this would’ve been, I don’t know, 92, 93, something in that order. It was probably an order for 50 to a hundred thousand graphics chips. Wow. At the time we would’ve always had a plan. B. I’m sure we, I can’t tell you specifically, it’s too long.

[00:06:29] Bob Burnett: I’m sure We had a plan B, which was, Hey, if the, we were designing for a specific desktop model, right? Yeah. And we were at Gateway. For those of you who don’t know Gateway well, and you may even wrote weak, we tried to push the edge. That’s our position in the marketplace was we were a little more consumer oriented than business oriented.

[00:06:47] Bob Burnett: And we tried to push the envelope. We were tried to push the, and the value, especially like that you could get, in this case, graphics performance at a certain level, at a price that nobody else had seen before. And so I’m sure that’s what we were chasing with Nvidia. They were a startup. They had some great architectural things.

[00:07:06] Bob Burnett: They’ve always it’s amazing by the way, for 30 years, they have been able to maintain that technical edge. My, my hat’s off to them, but yeah, there, there was a lot of, there’s a lot of risk associated in that too, but it’s the only way to have been successful. In the early nineties, the PC market was trying to sort itself out.

[00:07:25] Bob Burnett: Gateway was, at the time, probably about a billion dollar company. Probably 10 to 12 in terms of market share in the world. Something on in that order. But we hadn’t made it yet. We hadn’t IPO yet. The IPO is still a little bit away. So we had to have a little bit of that gunslinger attitude to chase and try to get to the top of the pile.

[00:07:49] Bob Burnett: As I said they were grateful for that. And so when we called up, some of you might remember in Twenty-seventeen, obviously we’re still in the GPU era, and especially in the non Bitcoin related coins. That was heavy GPU stuff. So if you could get access to the chips, you could do really well, least in fiat terms, mining.

[00:08:11] Bob Burnett: And that’s what we did. We built this design, got these things to market and did quite well with it. A little sidelight, just, I have a background in economics as well. More, more of a macro thing. I’m not on par with our buddies like James Lavish or Larry Lepard or Lin-aldin in terms of my macro. But I try to at least be proficient.

[00:08:31] Bob Burnett: And I have been, and it got turned on to Austrian Economics in the early two thousands, about 2001, 2002 when the dot-com bubble burst. I soured heavily. And so I started looking for something different. Short version of that story is I had done very well. I was part of the gateway IPO. I had done well, and then I cashed out a lot in the late nineties only to see a lot of that wealth evaporate through that crash in Yeah.

[00:09:00] Bob Burnett: In the crash. And I had put a lot of faith in traditional financial advisors and wealth advisors in that period, and they failed me. I started looking elsewhere what’s wrong? How can this be fixed? So I found Austrian thought at that point. As I started to, after getting like this order done and starting to sell this Ethereum equipment, I started to look deeper, technically at what Ethereum really was.

[00:09:26] Bob Burnett: Because at first this was just a computer guy building computers. That’s what that was. And then I started looking at it, and so first I looked at the technical aspects of Ethereum and I started to get uneasy. I could see the technical complexity that they were trying to tackle. If you’ve ever been involved in big software projects, you realize that they don’t work well and they rarely come together.

[00:09:51] Bob Burnett: They never meet their timelines. They basically never meet their goals and objectives. And what I saw was this piece of software, that’s why I was looking at it with all these tentacles and interdependencies that this isn’t gonna work. And then peeling deep into what really is proof of stake. And that led me really to Bitcoin and proof of work.

[00:10:14] Bob Burnett: And so I started to appreciate and understand, first from a technical perspective, but then seeing. The Austrian in me starting to see the monetary policy and the issuance and like these sorts of things and the sound money principles really coming out in Bitcoin. So we pivoted at that point.

[00:10:36] Bob Burnett: Unfortunately, we didn’t have access to a chip at the time. Maybe we could talk about that a little bit later. Yeah. But we didn’t have the ability to design our own systems at that time, but we did. So we did the be next best thing, which was we signed an agreement with Bitfury, which was a large European maker of Bitcoin mining equipment.

[00:10:54] Bob Burnett: And became the US distributor and Service Center for Bitfury Equipment. So that gave us an entree 20 18, 20 19, 20 20 to enter the Bitcoin world. And we migrated from providing systems to providing hosting systems to now largely, I guess you would call it self mining, although we usually do it through partnerships.

[00:11:15] Bob Burnett: But we do have a small hosting business and self-mining. But our real desire is to get back all the way to designing our own systems. 

[00:11:24] Preston Pysh: So I love This is the perfect lead-in to the next question I have, which is when we’re talking about application-specific integrated circuits, there’s basically one manufacturer in the world right now.

[00:11:37] Preston Pysh: Now I know Blockstream is working on a solution. I think they’re maybe in the test phase of the ASIC that they’re building, the rig that they’re building. You are working on, and I don’t know how much you can share, and if not much that’s perfectly fine. But I know that you’re working on your own ASIC and your own design work, and you’re working with some people from your past on designing this.

[00:12:01] Preston Pysh: So lay it on us if you’re able to, and if not, then beat around the bush as much as you want. 

[00:12:07] Bob Burnett: No, I can tell you a fair amount today, and as I’ve already leaded in I think that one of the things I’ll, I want to give a little bit more background. I believe in self-sovereignty as a miner. If I have something I call the miner stack.

[00:12:24] Bob Burnett: And if you can visualize this, it’s the energy, it’s the chips, it’s the systems, operational excellence, and the pools. Okay? So if you want to truly be a minor. And you want to deliver to the world Bitcoin and block space, then unless you control all pieces of that, at least to some degree, meaning own it.

[00:12:49] Bob Burnett: You’re not self-sovereign. It means you are dependent or you require somebody else’s permission to fulfill your vision. So for Barefoot and for what I’m trying to accomplish personally, that’s what I’m after. I want to own pieces of that. And you had a chance Preston to see what I’m doing, like on the energy side.

[00:13:06] Bob Burnett: Yes. Where you visited our facility at the ocean launch and where we own our own small hydroelectric facility among other things. We’re trying to do that. We’re trying to build on that stack. The next piece in the stack is the ASIC, the chip, not the machine. And by the way, it’s very important.

[00:13:24] Bob Burnett: We can talk about this a little bit more later, but I think it’s very important to, when you use the word ASIC, refer to a chip an application specific integrated circuit. And there. By the way, ASIC is not specific to Bitcoin either. For, I think a lot of Bitcoiners don’t understand that they’ve been around for over 30 years.

[00:13:44] Bob Burnett: I worked on my first ASIC probably in the late eighties for Power Manage. It was a power management circuit for charging. They’ve been around for a long time. They have really nothing specific to do with Bitcoin, but as you said today, Bitmain dominates the market. Bitmain makes chips in partnership with TSMC and they design the systems.

[00:14:09] Bob Burnett: If you look at the PC market, though, the PC market has Intel, it has AMD, it’s had other companies in the past, several other companies have been part of that. And they are distinct from the system makers. In other words, the chip guys do what the chip guys do, which is develop logic and work on wafer processes and things like that.

[00:14:31] Bob Burnett: And the system guys do what they do, which is they interact with the users and they build the machines that fit a specific need. I wanted to be involved in that. I got connected, so to fulfill my vision, I needed to do that. Building an ASIC is an expensive proposition, especially this, the kind of ASIC that we use in the Bitcoin world.

[00:14:53] Bob Burnett: Tens of millions of dollars, hundreds of millions of dollars, even really when you get down to it and in the very end. So I connected to a group. It’s led by a guy named Bumsu Kim. The company is called M-Fibers. Give the background on him. Yeah. Bumsu is a, among others, a former employee of Samsung. He would be credited by most people as being the godfather of the solid state disc.

[00:15:24] Bob Burnett: So he comes with pretty strong credentials, let’s just say. 

[00:15:28] Preston Pysh: So people just for the audience, so when you’re thinking of memory or you’re thinking of storing information, you have the discs that spin, and then you have a steady state drive that doesn’t spin. Obviously the latter is really important.

[00:15:42] Preston Pysh: If you’re dealing with any type of environment that vibrates or has environmental factors that you just can’t have a spinning drive, right? It’s faster because you’re not having to physically spin the disc in order to get to the spot of the memory that you’re trying to find. So the fact that he was literally the guy that invented this is this right Bob?

[00:16:03] Preston Pysh: Invented this technology for, 

[00:16:05] Bob Burnett: I think you would be considered the godfather of it. Yes. There’s a lot of people involved. It’s kinda saying who’s the inventor of the PC. Exactly. Yeah. Yeah. But the godfather, the central point of this whole thing coming together would be Bump Sue.

[00:16:19] Preston Pysh: And so he’s working with you on this ASIC. 

[00:16:22] Bob Burnett: Yeah. I think it’s more appropriate to say I am working with him, because I want to be fair. I am not, this is I am not the guy leading the basic design by any stretch of the Nation, but I can provide some insight and help as a system guy as a guy connected to pools and doing this.

[00:16:44] Preston Pysh: Does he believe in Bitcoin? Does he believe in Bitcoin, or is he looking at it just more from a hardware design standpoint? 

[00:16:50] Bob Burnett: No, he believes in Bitcoin. Wow. He believes in Bitcoin. As do the other members of the team. Which by the way, are no slouches themselves. We won’t go through individual resumes, but there are folks from Intel and Broadcom and companies like that.

[00:17:05] Bob Burnett: That are also part of this team and we’re focused, initially I’m acting on the board of advisors of the company and we are focused initially on the enterprise market. So we can maybe talk time permitting about where I think mining equipment will go. But I think we’ll see a divergence instead of one kind of machine.

[00:17:26] Bob Burnett: We’re seeing a little of that already. We’re seeing the bit-Axe folks and some other people trying to do things in different Sanches, but I think we’re gonna see the enterprise market truly move toward enterprise class computing. And that means different form factors, higher energy densities, and just to give people a sniff of what we’re working toward is a chip that would enable, for instance, single unit.

[00:17:54] Bob Burnett: Hashing power on the order of two to three petahashes or one unit, and 

[00:18:01] Preston Pysh: what is it today, just so people have the context. 

[00:18:04] Bob Burnett: Typical one would industries be about a hundred to 120 petahashes is 30 times higher. Then that. 

[00:18:13] Preston Pysh: Yeah. The thing that I would immediately think is, okay, so now there’s gonna be an infrastructure change.

[00:18:18] Preston Pysh: If you build this, you get it to production, you start selling these on any type of large scale. Do the mining facilities have any type of infrastructure challenges with the size and the energy that’s required to, to be pumped into something like this versus what they’re traditionally templated for because it’s very traditional, the sizing and the kind of the energy 

[00:18:38] Preston Pysh: constraints today.

[00:18:40] Bob Burnett: It means much higher energy densities, first of all. So in a given form factor, you’re gonna see much higher energy density. Now the AI market’s also seeing the same thing though, okay. We’re seeing what, for instance, companies like HP are trying to do with Nvidia to do this high performance computing for ai.

[00:19:00] Bob Burnett: We’re seeing the same sort of massive energy densities that the M Fiber group is trying to move toward. And it does present issues. For instance, a machine today, a common machine used in Bitcoin mining, like an S-Nineteen, might be about three kilowatts, and it sits in that shoebox form factor, which is pretty awkward by the way.

[00:19:21] Bob Burnett: Really? In my opinion, poorly done and not built, or on a large scale. The server market, the traditional server market, what you would see in a traditional data center standard, there is a standard rack mount size usually delineated and used per unit, right? So you could have, for instance, the Bifuria equipment that we used to work with was all done in that same vein.

[00:19:45] Bob Burnett: And we still have some of it deployed in some of our operations, but it’s like a six U form factor, which means 19 inches wide. Forgive me if I’m off a little bit, I don’t know, nine inches high or something on that order. It’s a very standard form factor. Also means that a lot of the components that go in that are standard too, that some of the power supplies and some of the things that go in there, you can leverage other industries that are using those same components.

[00:20:10] Bob Burnett: So as a system designer, there’s a lot of appeal to that. Those involved in Bitcoin mining, whether they’re at the hobby level or the commercial level, probably see things like, hey the access to power supplies and. Different components and things like that. It, they’re a little bit overpriced relative to other markets, but I think that’s largely because of volume.

[00:20:32] Bob Burnett: We, Bitcoin mining, are still a tiny industry. There’s a few million machines sold annually. And I like to put it back in perspective, Gateway was building 10 million PCs a year. So the Bitcoin mining industry as a whole still isn’t even at where Gateway was 20 years ago in unit volume. Wow.

[00:20:55] Bob Burnett: Yeah. And Gateway wasn’t even the top vendor. We were like number five. So just to put that in perspective we’re a very small industry. I’m not sure how big we’ll ever get, honestly relative to these other industries, it’s, I’m not exactly sure, but what we’re trying to do, like I said, with the M Fiber group, is really change this vector.

[00:21:17] Bob Burnett: Now, the truth is you mentioned something in full transparency. One of the things that we have to change is the people making containers and designing facilities and all that they’ve gotten pretty used to that form factor. This current, yeah, this current form factor. And so there probably will be one of those resistance points to this will be this, but ultimately I think that the efficiency and the cost effectiveness of these other designs will overpower the legacy, the need to be in the legacy that, because it just runs out of gas.

[00:21:55] Bob Burnett: It just cannot dissipate the thermals properly and all that. And I’m assuming this would be immersion. 

[00:22:03] Bob Burnett: Probably a lot, but not necessarily. It’s also fascinating 

[00:22:08] Bob Burnett: You brought up AI earlier. Do you see a world where it’s almost a necessity to have Bitcoin miners alongside AI GPUs?

[00:22:19] Bob Burnett: So that I’m thinking about, so these GPUs they’re plowing through all sorts of calculations for AI requests, and then people go to sleep at night and maybe they’re just not being pinged as, as much as they are during the middle of the day. But you’ve got all this energy that you’re that you’ve negotiated at really cheap rates for these data centers and processing centers.

[00:22:41] Bob Burnett: And why not mine Bitcoin with rigs that are there ready to catch that addition, that drop in load? Is that something that you think is gonna become commonplace or am I totally off the mark with that idea? 

[00:22:56] Bob Burnett: No, I think you’ve very accurately represented that because as right now we’re at a point in AI where if you’re running some sort of AI application, it’s somewhat similar to Bitcoin, where the demand is almost twenty-four by seven.

[00:23:12] Bob Burnett: There’s so much money in infrastructure being thrown at it. It’s hard for me to believe. That every AI center is going to be able to maintain a constant load. And so I think that problem is definitely going to come. I’ll say one other thing though, and that’s that maybe the machines that sit next to the AI machines aren’t just mining Bitcoin and Yeah.

[00:23:44] Preston Pysh: I think I’ve talked to you a lot. Yeah. Yeah. I want to get into this just a little bit. Yes. I don’t know. Yeah. So you have a company that you’re looking at, I don’t know how, where you’re at with this is it called chaos? Is that correct? Yeah. Is that where you’re going? Yeah. Yeah. I just want to just take a quick step back.

[00:24:01] Preston Pysh: So like, when we think about AI and we think about what it’s doing and how it’s taken all of these patterns, it’s compressed these patterns. And then you’re basically pinging that compression to unwrap and pop out an answer. So it’s like highly organized data. And then next to it, on the Bitcoin mining side, we’re trying to, how do I even describe this?

[00:24:24] Preston Pysh: Figure out in the most chaos that you could possibly imagine, the one input that produces this output and these two computers would be sitting side by side. Are they literally doing the polar opposite of each other? Is this literally like a yin and a yang from deep pattern detection? It’s not even, what’s the word I’m looking for?

[00:24:47] Preston Pysh: It’s like they’re literally polar opposites sitting next to each other. So it makes sense that would be like the construct from a hardware standpoint. Yeah, 

[00:24:55] Bob Burnett: I totally get it. It is a service song. I don’t know if it’s coincidental or not, but it is an amazing observation that, and I do think it is a very logical extension of this now.

[00:25:09] Bob Burnett: What I will say is it’s likely that in those situations that this is part of a cascade of technology. If I was designing such a center, if I was putting up a new AI center, I probably wouldn’t go put S-twenty-ones and high-end Bitcoin mining equipment there that is sitting idly Yeah. Waiting for the energy to free up to go run for a few hours or a few days and turn on and off.

[00:25:39] Bob Burnett: That, I think it, but if I had a bunch of old S-seventeenths, maybe older S-nineteens right now that are toward the end of their useful life, in normal circumstances, I would probably locate those there. Like they’re the backup. We have that sort of situation with hydro, in a hydro situation.

[00:26:02] Bob Burnett: You often have a base level that is produced on a constant basis. Relatively constant basis. And then it rains, something happens, you have a bunch more water flow and boom, you have some extra. So what do you do? You take and you put new or more efficient equipment that runs essentially 24 by seven in the base load.

[00:26:25] Bob Burnett: And then you have the other stuff standing there. So in those cases, there was a rainstorm for two days you’re gonna have an extra 300 kilowatts. Okay, great. Then run the old stuff because it’s free energy at that point. We design that way and so I think the same sort of principle would apply in AI, like this AI situation.

[00:26:47] Preston Pysh: Yeah. That’s so fascinating. Anything else you want to highlight on the chip or on the ASIC side before we go over to this chaos discussion? 

[00:26:58] Bob Burnett: I’ll just say it’s a long path. We all wanted to go quickly. You mentioned some other folks like Blockstream and Block and others are working on chips.

[00:27:09] Bob Burnett: I am very supportive of what all those folks are doing. I will look seriously, I already have looked at some of the chip designs there. We need that this development is really important to the development of a healthy ecosystem. And I think to a certain degree, separating the ASIC from the system is very important, it will drive innovation.

[00:27:35] Bob Burnett: First of all, you get the best system designers and the best chip designers and they each specialize. I think that’s a natural market. It’s a natural thing to happen in a market. I think more importantly, it creates diversity. That, when I speak sometimes, one of the things I’ll speak about is building Bitcoin to be money for a thousand years.

[00:27:59] Bob Burnett: And most people think, I would say in a very myopic way. They may look back two years and forward six months or vice versa. That they’re very narrow. And I see that happen a lot in the industry. Instead of really stepping back and saying, let’s look, let’s take a several decade view or a couple century view of things.

[00:28:21] Bob Burnett: And I know it’s hard to do, it’s hard to make money thinking that way, but I think from the perspective of making sure that we design Bitcoin, by that the entire ecosystem, all the components of the ecosystem such that we don’t create vulnerabilities. Usually those are centralization. Points.

[00:28:42] Bob Burnett: But they could also be single points of failure. So if you envision a world. Where only Bitmain makes chips, and then I’m not picking on them specifically, but if you have only bitmain making chips, only bitmain making systems, you now have a single point of failure. If they build a couple generations of chips, and I’m just speaking hypothetically, there was something wrong or some vulnerability in those chips, we have a huge problem, right?

[00:29:10] Bob Burnett: And the whole thing crumbles. We need this. It’s very important that we get this landscape so that those things can’t happen. Because when you look in a short-term window and you say, what’s the likelihood of there being that vulnerability, even in the equipment that’s sitting out in the field today, pretty low.

[00:29:30] Bob Burnett: I can’t put a number on it even, I don’t know. But let’s just say for argument’s sake, it’s one-tenth of 1%. Are there any odds? That’s the case. When you apply that to the next year, there’s a ninety-nine 0.9% chance. That nothing happens, right? When you apply it to a thousand-year window, it becomes way more highly likely.

[00:29:53] Bob Burnett: Yeah. That happens. So in other words, that’s not me saying, I’m not trying to panic anybody or anything like that, but we have to recognize when these as a community, like almost that’s I think a responsibility of the community to Continually look at those things and say whether it’s full centralization, ASIC centralization, Geographic centralization, lack of a derivatives market, maybe we can talk about that in a little bit too.

[00:30:18] Bob Burnett: There’s all these different things I think that could create vulnerabilities to the long-term viability of the ecosystem. And as I know you’ve talked about, we will probably only get one crack at this thing at doing it and doing it right. And if we don’t. The existing system will win, and there are major motivations for those who don’t want us to succeed, to try to expose those vulnerabilities.

[00:30:45] Bob Burnett: They will continually be tested. Bob on this one in particular, it just seems that creating your own ASIC to compete with Bitmain is so capital intensive. I’m just thinking about the expertise in order to create the ASIC, have all the considerations, whether it’s heat, whether it’s you name it.

[00:31:06] Preston Pysh: There’s just I talked with Adam back probably a year ago, or almost a year ago, about their efforts at Blockstream building theirs, and he described it to me. He’s like truly trying to engineer a sports car like you are trying to make the thing go as hard as you possibly can or else it’s just not competitive.

[00:31:25] Preston Pysh: And when you’re pushing the limits on the design from an engineering standpoint, you’re running into, oh, I just fried a circuit board because I’m pumping too much energy through this thing and I didn’t have the proper, or whatever the case might be. Things that you’re not thinking about. If you’re not sitting there designing this thing, not only do you have to engineer it, then you have to go through the test cycle.

[00:31:45] Preston Pysh: Then after you go through the test cycle, you’ve got to get people to give you, like you, the number you said was a hundred, call it a hundred million dollars for production. Then you push out the production and you don’t have, especially if this is your first rodeo, you don’t have a really high fidelity on what the reliability of that newly issued design and product is.

[00:32:07] Preston Pysh: If you’ve done it for five or 10 years, you might have a much better understanding of what the reliability is because you know these components and the pieces and all the mistakes that you’ve made along the way. But if you’re doing it for the first time, like these are risks, right? And then like you don’t control that entire production line.

[00:32:24] Preston Pysh: You might have everything lined up. You might have the capital there and then you might have some bottleneck that’s upstream, three paces some manufacturer, three upstream of you that the long lead on that is six months behind where it was and you were supposed to have these things out the door.

[00:32:41] Preston Pysh: And so all of those risks that I’m talking about are just super capital intensive. It’s time intensive and I’m not trying to make an excuse for why there isn’t a competitor in space. I guess I’m just trying to rationalize for the audience so that they can understand why Bitmain has basically been in this predominant role.

[00:33:01] Preston Pysh: And you said it yourself, the volumes aren’t high compared to manufacturing other sorts of hardware, whether that’s GPUs or whatever. I think that’s the challenge that we’re really up against, and I’m just thrilled that people like you and Adam and Jack Dorsey and others are stepping into this space to really try to offset that from just peak.

[00:33:22] Preston Pysh: Like really some of the strongest engineers there are going after this. It’s really exciting. 

[00:33:29] Bob Burnett: You’re right. I do want to reiterate again that Bumsu, who I mentioned he’s the leader of this one. I’m along for the ride and supporting him and helping him. Yeah. But he, hopefully I’m contributing.

[00:33:41] Bob Burnett: But my involvement, I think, does speak to how serious I think filling this gap is. Yeah. The need is so big and the fact that guys like Adam and Jack are doing similar things in their way also I think speaks volumes about it now, it also speaks volumes too, we all believe we’re not doing it.

[00:34:04] Bob Burnett: I don’t think any of us are doing it. Purely from a philanthropic or we believe there’s a lot of money to be made. Yeah. There’s a win-win. Believe that this, to do it right, this can be massively successful. And you’re right though there are a tremendous number of risks. We’re still in an early stage company.

[00:34:25] Bob Burnett: We, we, by the way I’ll say this. I can only say so much. We believe we’ve got major architectural enhancements. We believe we have the relationships with the foundries to be at the very leading edge of which is huge. Yeah. Yeah. That’s huge. And that’s important.

[00:34:47] Bob Burnett: And that by the way, that speaks to the fact that we’ve got Intel folks and Samsung folks and Broadcom folks in very senior positions from those companies. They have the relationships with those organizations that can help make that happen. It’s not a foregone conclusion that we are successful.

[00:35:04] Bob Burnett: ’cause as you said, there’s a lot of stepping stones. A lot of it is financial. We’ve got functioning FPGAs right now. So that’s a process you go through of design and then you take it to an FPGA and we’re flushing some stuff out architecturally there. And then it moves toward, okay now you’ve got to take that logic and work toward the ASIC.

[00:35:26] Bob Burnett: But we’ve been able to prove in concept, in actual logic that some of the performance enhancements that we are expecting to get are gonna come from that. And as you said we could fail just in capital raising that alone could cause the problem. At some point we need support from whomever to, to take us through these different stages.

[00:35:48] Bob Burnett: And so we’re actively in that stage right now, by the way. We’re actively trying to get from this stage to the next stage. And who knows what hopefully people believe in. And also, especially in Bumsu, and we’ll support it. 

[00:36:04] Preston Pysh: Just to hit on this term, FPGA, this is a field programmable gate array, and this gives the guys like yourself flexibility to implement custom hardware functionality without having to design custom chips from scratch.

[00:36:19] Preston Pysh: This is always in the prototyping and R&D phase that you’re doing this. Correct? 

[00:36:24] Bob Burnett: Yeah. There was actually a brief period in, in, in Bitcoin’s history where people took. ’cause we’re migrating from the GPU to the ASIC. And there was a brief period where systems came out based on FPGA, but it’s really not economical and it isn’t , but it’s a stepping stone.

[00:36:45] Bob Burnett: Then, I appreciate you clarifying the term for folks. I’m sorry for dropping. Oh, no. And, but it’s just to say that maybe if I could put it in a different term, you could think of it as very early prototypes are already working. Put it that way. 

[00:37:02] Preston Pysh: Yeah. Yeah. Without much preparation, without much risk.

[00:37:05] Preston Pysh: Not ready. Yeah. Without much risk of it being actually on the hardware. Yeah. Let’s talk about this chaos. Okay. So I think the conversation probably starts best by saying you don’t like the term ASIC or that you think that there’s risk in the term ASIC. So go ahead and start there, Bob. 

[00:37:24] Bob Burnett: ASIC used properly is fine.

[00:37:26] Bob Burnett: We just define what it is, which is an application-specific integrated circuit. It’s a chip designed to do a specific thing, and that can be all kinds of things like the car you drive, the TV you watch, the laptop that you might be on. They all have ASICs in them, maybe multiple ASICs. And so that basic idea is when you have a circuit and it does something like maybe it’s the headlight control of your car and the dimmers and turn the brights off when a car’s coming.

[00:37:56] Bob Burnett: All that sort of logic that could be in an ASIC and it probably is. And whatever car you’re driving, we have taken as an industry to calling the machines like an S-Nineteen, an ASIC. This is the machine itself, which usually includes several hundred ASICs chips, but in and of itself is not an ASIC. And some might just say, oh, Bob’s this old guy who’s ornery.

[00:38:22] Bob Burnett: But hopefully my reason why I’m a stickler in this one will become apparent here in a second. So it is completely inappropriate to call the machine an application specific device. And I would say it is actually very dangerous to call the machine an application specific device to exemplify that. Let’s look at some of you might remember Dane, let’s see.

[00:38:45] Bob Burnett: It was the Digital Assets Mining Act. About a year ago, the Biden administration proposed this tax. It was a proposal to tax energy consumption of Bitcoin miners at 30% that was defeated. However, in places like Sweden and Kazakhstan, similar legislation has already been imposed and is in place in those sorts of countries.

[00:39:11] Bob Burnett: So an attack vector to Bitcoin are legislative regulatory taxation directives at the industry. So when we call a given device like an S-Nineteen in ASIC, we’re playing into that hand. We’re saying this is an application specific device, therefore the energy consumed by that device can easily be subject to whatever this act is trying to impose on it.

[00:39:41] Bob Burnett: I find that very dangerous. I might say Bob isn’t in an application specific device it doesn’t have to be. When this started coming about it actually, my thought process about it actually started Kazakhstan when the China mining ban occurred. A whole bunch of hashrate went to Kazakhstan.

[00:39:59] Bob Burnett: Some of you might remember that. It suddenly put a big strain on their countries. It was a relatively small country, and it did put a strain. From an energy standpoint, you’re 

[00:40:12] Bob Burnett: saying from an energy standpoint, yeah. Yeah. You had this relatively small country with very low energy costs.

[00:40:19] Bob Burnett: And they got flooded overnight. And so I understand to a certain degree why they did that. They did the simplest thing they could do, which was, hell, we’ll just tax these guys, and they may view things like property rights and civil rights very differently. I don’t profess to understand much about the Kazakhstan constitution.

[00:40:40] Bob Burnett: So anyway, as I looked at that, what I realized was I don’t think these have to be application-specific devices. In fact, what I believe we can do is prove to the world that they can do other things. If you look at an individual machine, and certainly at the network. As a whole, what we call the Bitcoin Mining Network, or what we call an s-seventeen, they really are entropy engines and they have greater than any device ever produced in the history of mankind, the ability to create entropy.

[00:41:18] Bob Burnett: So I said I think I’m gonna start a new venture. I found this one myself and found it myself, called Chaos CAOs. And again, for those of you who are maybe not as well versed in scientific stuff, but chaos and entropy and its randomness are all the same thing, right? They’re birds of the same feather.

[00:41:40] Bob Burnett: And I know you have a background in engineering too. Yes. To Preston. Yeah. You’ve heard chaos theory and we, you hear about entropy talked a lot about within the world. Sailors did some great stuff on entropy, right? So I said why don’t I create. An entropy engine with this thing instead.

[00:42:01] Bob Burnett: And so my first step was to prove that we could do that. That we could write software that we could run and interact with, as an example, NS-Nineteen, and not mine Bitcoin, but just create massive randomness. And by the way, do it in an auditable and verifiable way. That’s the other thing about randomness, is that there are sources of randomness.

[00:42:30] Bob Burnett: For instance, the greatest sources of randomness today, if you have a need for a random number, some of the greatest sources are devices that monitor atmospheric noise and translate atmospheric noise into randomness. There’s a group, if you’re ever interested, just Google on YouTube or go on YouTube and search for Lava Lamp.

[00:42:54] Bob Burnett: Entropy or lava lamp randomness. And there’s a company out there that uses the globs of lava lamps to create random numbers. But all of the random number generation that kind of sits out there in the world is still dependent on an interpretation by a third party. It requires confidence that the third party algorithm isn’t subject to patterns itself or corruption.

[00:43:22] Bob Burnett: It’s very difficult. So what we did is we said we are going to use things that we’ve learned from Bitcoin, but apply ’em completely differently and use the machine in a different way, which is we are gonna create sources of auditable and verifiable random numbers. And there’s a massive market for that, by the way.

[00:43:40] Preston Pysh: Massive. Help people understand what the value prop is here, because they might be hearing this and be like, this is, this doesn’t make any sense. But when you get into encryption and you get into the security of telecommunication systems, this is vital. This is ’cause you get into elliptic curve cryptography and you get into creating a private public key.

[00:44:01] Preston Pysh: And so much of the risk comes down to how random were the numbers that were being used on the processor to create this stuff. Exactly. And you were talking about the thermals, like now you’re physically taking a picture of something to convert that into randomness. But not, but you’re limited, you’re rate limited by that physical thing that’s taking the picture or the lava lamps that are moving.

[00:44:27] Preston Pysh: And can that, I would assume that’d be way slower than using a Bitcoin miner, which can just churn it out cryptographically provable way faster is that correct? 

[00:44:38] Bob Burnett: Yes, that is correct. And if you are using random numbers a simple one is a lottery yeah. Lotteries have been corrupted.

[00:44:48] Bob Burnett: So we can talk more about gaming in a minute, but gaming is probably the single biggest market for this. As you’ve said. Anything involving cryptography, passwords, signal integrity protecting a line of communication signals. It’s used in financial modeling, like Marty Cardle analysis. I have a story for another time about a back from my gateway days, but I don’t want to detract from this too much, but we did a lot of work in this area working with pharmaceutical companies to help them crunch numbers.

[00:45:18] Bob Burnett: Because so much of the pharmaceutical research today is to look at, hey, there’s a given protein and here’s a virus, let’s say and how will this protein potentially dock with this? And what you want to do is you just want to throw a massive number of permutations at this thing. And you want ’em, but you want ’em to be truly random.

[00:45:38] Bob Burnett: You, you want to make sure you’re not prejudicing anything in any one way. What we’ve created, and I’m gonna very shortly, I will tell you this. I’m gonna have a website called chaos engines.io okay? TAOS engines.io. The preliminary is gonna be beta-ish, so bear with me folks. But it will come out here shortly.

[00:46:03] Bob Burnett: Today’s whatever is February 13th. It’ll come out shortly, but probably before the end of the month. 

[00:46:09] Preston Pysh: Here’s what will come out here, Bob. Here’s what’s neat about this show. A ton of our listeners are from the future so they’re listening to this a year from when we recorded it, and I’m sure your site looks amazing right now for many of these listeners.

[00:46:22] Bob Burnett: I’m looking forward to that. What we’re gonna do is we’re gonna provide this free service to people. If you just need a random number or something. You have a bet with a friend, we’ll be able to provide you an auditably verifiable random number and how can we do that?

[00:46:38] Bob Burnett: Because we use the same technique that Bitcoin uses. Similar block construction, similar hashes, similar, all those sort of things, but we’re using the output in a completely different way. We are also working on a gaming platform itself, which will be called Chaoshouse.com, and it will be a place where you can go and you can play blackjack or a dice game, or flip a coin and gamble on it, but know the source of the numbers generating that gain.

[00:47:13] Bob Burnett: Come from an 

[00:47:15] Bob Burnett: verifiable entropy and they’re auditable and verifiable. And if you can say, I can’t believe I just rolled three sevens in a row on a craps table. We can prove to you that no, you actually just did, or you lost 14 hands of blackjack in a row. We can prove to you.

[00:47:33] Bob Burnett: No, you really did do that. 

[00:47:35] Preston Pysh: Said, so could you take, I said, so could you take the others? So if the numbers are truly random, can you take the other side? 

[00:47:42] Bob Burnett: Yes. Thank you for bringing that up, president. ’cause a neat thing about our gaming platform is we will allow people to play either side of, you can either be the house or you can be the player. 

[00:47:53] Bob Burnett: It’s oh, dear Lord. So we’re so it becomes truly a, it becomes a liquidity provider, like source of liquidity. Exactly. I guess I’m thinking through, yeah, I would have to sit 

[00:48:06] Bob Burnett: down and think about some, yes. When you become the house, that’s really what you’re doing is you’re providing you’re pride providing liquidity to the house side of the equation and so what it does is, because I want to get back to the main point this all started from, and I think this is really important, like philosophically, like whether you even like what we’re doing or not, you can hate what we’re doing, but what we are doing is proving that an S-nineteen or a similar piece of equipment does not have to just mind Bitcoin and that it can, and it will be used to do other things.

[00:48:41] Bob Burnett: Just like I happen to be on a MacBook Pro having this chat with you. That machine could mind Bitcoin today. It could also run an Excel spreadsheet or run this Zoom session. If you are a government entity and you know somebody has an S 19, you can’t necessarily assume that it is mining Bitcoin. It could be doing something completely unrelated to Bitcoin.

[00:49:06] Bob Burnett: And therefore, in my book, it would be a massive invasion of privacy for you to be asking me what application I am running on my computer. And s-nineteen, think of an S-nineteen as just a different type of computer. It’s just a and so if we are going to allow the government or any entity to infringe on our privacy and our right to use our computing power as we see fit, I think we should all, even if you hate Bitcoin, probably not listening to this if you, if hate Bitcoin, but even if you are, you should stand with US United, that this would be a massive intrusion.

[00:49:44] Bob Burnett: Same on energy usage itself. Yeah, use computing power. As you see fit and use energy as you see fit. Those, I believe, are intrinsic rights. Yes. That we need to protect. If we do not and we allow that threshold to get crossed so that people can intrude on what we’re doing, then everything’s lost.

[00:50:07] Bob Burnett: Amen. 

[00:50:09] Preston Pysh: Amen. Because if you’re a net producer in your day-to-Day activities, and you’ve stored your retained earnings of this excess that you’re producing for the world, I, and you believe that you should be able to spend that excess anyway, you want that, somebody shouldn’t come be able to come in there and say, oh, I don’t.

[00:50:28] Preston Pysh: I don’t like the way you use your washing machine. I think you should do that by hand. It’s no, how about this? 

[00:50:32] Bob Burnett: Go screw yourself. Exactly. It’s a very dangerous slope if we vary, if we go down that path. And I would say that’s definitely true in the United States where you and I are Preston, but I would say to everybody around the world that might be listening think about this and push back against it because it’s already happened in a couple countries and I don’t think the people in those countries realize what they’ve allowed to happen.

[00:51:00] Preston Pysh: Yeah, you got to fight back. You had some math, I think you posted this on Twitter, X, whatever the heck we’re calling it these days. A couple months back you were talking about the math on the halving and it made total sense. But I think for a lot of people that would hear the way that you’re laying this out, they might take a step back and say, wow, I wasn’t thinking about it from that perspective.

[00:51:21] Preston Pysh: Do you know what post I’m referring to? In reference to the reduction, I’m not sure. You were talking about fees. The fees and how the math is really changing from where it was a couple cycles ago. 

[00:51:32] Bob Burnett: Yeah. Lay this on. Sure. Sure. Miners are rewarded with a subsidy and fees.

[00:51:41] Bob Burnett: Subsidy is currently six and a quarter. Bitcoin, the fees have a historical average of about a third of a Bitcoin. Recently they’ve been up in 2023. They were up slightly from that number, but largely unchanged over, interestingly, largely unchanged over the entire history of Bitcoin. Interestingly, as fees have largely remained unchanged, the subsidy has fallen dramatically.

[00:52:06] Bob Burnett: And it will now be what, just over 6% of what it was at the beginning. So we’ve lost 94% of the subsidy. And so it means that fees are climbing as a percentage of minor revenue every time that’s happened. Now we are at a point where we’re starting to see fees uptick, and maybe we can dive a little deeper into why I feel the way I do, but I believe we are on the cusp of a massive change in the fee structure.

[00:52:36] Bob Burnett: A lot of people probably don’t like hearing this, but I believe fees will be face-meltingly high in the next epoch and beyond. I will not be surprised if we exit the next epoch. The fees and the subsidy are about the same, meaning roughly three Bitcoin per block in fees and roughly three Bitcoin per block and subsidy, and then going into the next halving, which is only four years away.

[00:53:07] Bob Burnett: By the way, we’re right there, right? We’re four years away from the subsidy going to 1.56 and fees will still be three. So what does that mean? That means by four to five years from now, minor revenue is two-thirds. If I’m right, minor revenue is two-thirds fees and one-third subsidy dramatically.

[00:53:29] Bob Burnett: There’s a huge ramifications of that and for miners, but human ramifications for everybody really. 

[00:53:37] Preston Pysh: So I, so when we’re thinking through this, the thing that I guess I find most fascinating with what you’ve said is that it’s been about a third of a Bitcoin since inception, despite the halving changing and despite, for the most part, the mempool I guess it got really full there and the, what was it, twenty-seventeen.

[00:53:56] Preston Pysh: Twenty-sixteen timeframe. 

[00:53:58] Bob Burnett: Yeah, A couple brief periods. But we had the whole we had all of twenty-twenty-three. It was packed all the whole year. 

[00:54:06] Preston Pysh: Yeah, we’re like a hundred ninety-five blocks deep in the mempool right now. But the fees aren’t too high. I think we’re at like 20 s SATs per VB right now.

[00:54:15] Preston Pysh: Why do you think that you’re saying that this next four years is going to really turn it on. Is it all of the crypto that’s coming and strapping itself to the side of Bitcoin? Is that what’s gonna drive it? What’s the main driving factor? Because I think you could make the argument that these ETFs are reducing an enormous amount of transaction space on layer one.

[00:54:41] Bob Burnett: There’s some truth to that latter point, I would say for sure. But let’s look at the math a different way. Each year, there are about 53,000 blocks produced. There’s very little that can be done to change that won’t waver. Each block has a capacity of 4 million weight units. And so for those of you who maybe don’t want to think in those terms, ’cause it’s a little complex, just think that an average block of 4 million weight units has about 3000 transactions in it.

[00:55:17] Bob Burnett: Yeah. So if we can translate that, so you have 3000 transactions per block, and let’s even round down and make the math even easier. 50,000 blocks a year, that means 150 million transactions. Now those aren’t the most efficient transactions. There’s a lot of inefficiency in them. I think some things can be done to increase that efficiency, some of them by user behavior.

[00:55:43] Bob Burnett: And we may see today’s not the day to debate CTD or covenants or any of those other things. You did a great job with NPK recently, so you guys covered that really well. But let’s say then even the max is 200 million. Okay? So that means 200 million transactions. There’s almost nothing that we can do to materially change that number.

[00:56:07] Bob Burnett: That 200 million transactions has to serve all 8 billion people in the world, and the 330 million companies that exist in the world. We, for the last year have been at full capacity. If you look at the whole year I have a one of my members of my team we do a bunch of blockchain chain analysis stuff, and we pull our own data and we scrape it, and there was no room for more last year.

[00:56:33] Bob Burnett: The year was packed. And that was with you tell me what you think Preston, but let’s say maybe 50 to a hundred million people max active in the network. Yeah. And maybe one company, let’s say company about the only one of the 330 million companies. I’m exaggerating honestly but effectively zero companies active and almost effectively zero people.

[00:57:01] Bob Burnett: I give this example sometimes about scarcity. I put a lot of thought into scarcity. So one of the things to realize is that the price action on scarcity is non-linear. Here’s the example I came up with. Hopefully it illustrates this. Pretend I have an apple tree. It’s the only apple tree in the world, and this apple produces a hundred apples per day.

[00:57:23] Bob Burnett: Now, at the point when demand for apples is ninety-five apples per day, they’re really cheap. I’m throwing five away every day. Yeah. Okay. The moment, 101 people on apples, the price skyrockets. So it’s only a change of six apples in demand that caused the price of apples to skyrocket when 150 people or 200 people per day want apples.

[00:57:48] Bob Burnett: But my tree only produces a hundred and there’s no more apple trees, and there’s no way to increase the a hundred. It gets face. Meltingly expensive to buy an apple. Now the only caveat is if these people all want to eat one apple a day, then it’s really face melting. If some of ’em are in a non-urgent situation where they need an apple, then maybe they wait for a day when for some reason the demand dips from 150 a day down to ninety-seven, and they get one on the cheap.

[00:58:18] Bob Burnett: This is my illustration of the way the Bitcoin network has been for the last year, we have been largely sitting at like demand for ninety-five apples. Yeah. And with maybe we bleed over to a hundred, 101. And when we do, what do we see? We see the mempool in very short windows go five x or 10 x on the estimate per V-byte for a fee.

[00:58:42] Bob Burnett: Now these transactions, like you said some can be delayed, some can move to L-two. Oh, okay. If I’m doing a small transaction. I can move it to lightning. If I’m buying for just long-term holdings, maybe I buy the ETF. So those, you’re right, those activities can defer it. But there’s still 8 billion people.

[00:59:05] Bob Burnett: There’s still 330 million companies. Yeah. And by the way, when you say you move something to L two or you move it to the ETF, which I don’t know, what do you call that? We call that an L two or an L three, or I don’t know what we call that, but not L one. Yeah, But that still by the way, means that BlackRock, or Bitwise or Franklin or one of these companies is doing a base layer resolution Now.

[00:59:28] Bob Burnett: That’s right. It may be batched with some other people buying the same day, but they’re doing a lot of those transactions. If we hit a bull run, which I’m fairly confident we’re about to be in, if we’re not already in, then if we see 50 to a hundred million Bitcoiners, move to 250 million and then to a billion and then to 2 billion.

[00:59:53] Bob Burnett: There’s no way, like the base layer just breaks down. I shouldn’t say it breaks down. It’s, it just gets expensive. It’s handled. Yeah. It just gets, it gets, yeah. I think that’s one of the things is I’ve had, when I’ve talked about this a few times in the past of people, I think I’ve taken it as me being like anti base layer or anti maxi or something like that.

[01:00:13] Bob Burnett: But I’m just trying to paint the reality of it. Yeah. And it is what it is. And the company adoption, so it’s your target and you start taking Bitcoin, how many times per day are you gonna want some form of basically a resolution with the ins and outs of your money? 

[01:00:32] Preston Pysh: Yeah. It’s gonna be a function of the fees.

[01:00:34] Bob Burnett: Yeah. It’s gonna be a function of the fees. Now that was I’ll be honest with you, that was so well-framed from the initial conversation. ’cause I think people hear the initial conversation and they’re just like, okay, so how’s he coming up with this? Is he just plucking this outta thin air?

[01:00:50] Preston Pysh: Is this his imagination? And there are very real numbers that are like slapping you in the forehead. To be honest with you, until you framed it that way, Bob, I was just ah, maybe I don’t know. But when you put it in the, that context, it is so in your face that you, I. I don’t know how anybody could disagree with you like it this is gonna get aggressive, this is gonna get pretty crazy.

[01:01:14] Preston Pysh: But at the end of the day, like if you’re not moving around enormous amounts of buying power, you’re not going to, you’re gonna be priced out of settling on layer one. And maybe that’s okay. I’m sure there’s a lot of people that’ll disagree with that. They think that everybody, but you’re not gonna have the security and the decentralization on layer one.

[01:01:31] Preston Pysh: If you want everybody on the planet, all 8 billion people to be able to do L one, you’re not gonna have that. So you got to have trade-offs like anything in life. It’s just so everything works. 

[01:01:41] Bob Burnett: Yes. That’s the reality. We can’t have our cake and eat at two, right? Just there’s this trade-off and it’s what I went back to like, why did I abandon Ethereum?

[01:01:51] Bob Burnett: That was it. Cause of this is why you can see that this is the path. Now there are major ramifications of this clearly because there is a mindset within the Bitcoin community that is difficult to undo. This not your keys, not your coin. It’s true, but not everybody can have their keys.

[01:02:13] Bob Burnett: It’s not practical. We can’t tell everybody to do it that way. One of the things I’ve said in the past is that a lot of people look at the subsidy as a subsidy for the miners think that’s typically ’cause it’s part of the reward. And they think about, oh, this was to reward the miners through the dark days.

[01:02:33] Bob Burnett: I think that was only half of the story though. And so you, we’re obviously constantly amazed by Satoshi’s genius. There’s too much genius to have been coincidental. And part of that is, no, the subsidy was also a subsidy for the users. It was a, the subsidy was there to give a period of time in which we could have essentially unlimited access for free.

[01:03:00] Bob Burnett: To the most secure network in the world that was free. And the reason fees were effectively zero was because of that. It was to incent user adoption. I think that’s over the introductory period is over. This is like the we’re in early February right now, probably in gyms all around the world.

[01:03:20] Bob Burnett: In January, there’s a free first month of membership in your fitness club. That ends and you start paying in February. That’s where we are in Bitcoin. We’re through the introductory period. And then there’s a lot of ramifications though, beyond that too. So as an example, as a minor, when we move from most of our revenue being subsidy to most of it being fees, that means also that our revenue stream moves from something that is fixed to something that is variable.

[01:03:56] Preston Pysh: Yes. So now you’re getting into derivatives. 

[01:03:59] Bob Burnett: And so like you have, you’re much more astute and knowledgeable Preston than I am in financial role. But one thing that I’m pretty confident in is that any commodity that’s produced for it to mature and really take off it, there’s like always a derivatives market, whether it’s an agricultural product or precious metal or whatever.

[01:04:21] Bob Burnett: There’s a, and part of that on one side is that the producers can lock in some certainty about future demand and future price. So if you’re growing corn in Iowa and it’s may, you can sell some of your October harvest off, you may not sell all of it. You may sell a part of it, right? You sell a part of that future harvest.

[01:04:49] Bob Burnett: Then on the, at a fixed price that you know, you can be profitable at, and maybe you take, maybe you sell off 30 or 40% of it and the rest you ride with the wind, and maybe as time goes by, you sell off more and more. The other side of that is there are companies that need corn to for whatever they make, right?

[01:05:09] Bob Burnett: Whether that’s a bakery or somebody feeding cattle or whatever. They have the same thing, like they have this variable cost structure, and if they don’t lock in that price of corn, they have the problem. Block space is the same way. Block space in and of itself is a commodity. Bitcoin mining companies today, in today’s world, I think what if you said, what is the product of a Bitcoin mining company?

[01:05:39] Bob Burnett: You would probably say it’s Bitcoin and it goes back to that subsidy. What we produce primarily is the Bitcoin. We get these little tips or fees that kind of are just a little cherry on top that flips maybe in as soon as five years. It flips to where, as I said, we have this variable thing. The variable thing is not really tied to the production of Bitcoin.

[01:06:06] Bob Burnett: What it’s tied to is the production of block space. So that’s a whole different paradigm shift, right? Like that. What we’re producing is not Bitcoin. We’re producing block space as a mining company. To keep it simple, and we’ll put it in today’s terms, if I own 1% of the world’s hash rate, and I also have control of the block template, meaning I pick what transactions go in the block, then I control 1% of the world’s transactions, and those transactions are virtual real estate, and I can sell that.

[01:06:45] Bob Burnett: I can sell that into the future. 

[01:06:46] Preston Pysh: You can sell it OTC. You can sell it on the mempool, which is basically like a spot market, right? Yeah. But you have to be able to control the template. 

[01:06:56] Bob Burnett: Yeah. And so I believe that mining companies will work very hard to moderate some of that. Interestingly, there’s a second side of it.

[01:07:08] Bob Burnett: If I am BlackRock, if I’m in exchange, I’m a company like that, I might be doing a hundred base layer transactions a day, let’s say now, right now. Is that a meaningful part of my PNL statement? No, it’s not today. But in this future world where fees are maybe 30 times higher on average than they are today or a hundred times higher, it becomes a meaningful part of the profitability of my organization.

[01:07:36] Bob Burnett: Very interesting. So what do I want to do? I want to buy these futures contracts and lock in a future price. So that a minor and then facilitate a relationship. Yes. I think this is an important part of the long-term health of the infrastructure. It’s probably scary to people. There’s even parts of it.

[01:07:56] Bob Burnett: I get a little Willie’s myself ’cause it, but it’s such a dramatic shift from where we are today. But it means, yeah, you know what a lot of the financial institutions and a lot of the big guys are coming in and when they come in, they’re gonna drive these sorts of they have these needs and they’re gonna drive these kinds of solutions.

 

[01:08:17] Preston Pysh: The expertise in all this though, it exists, right? It’s just not pointed at Bitcoin and the whole Bitcoin ecosystem yet. But the expertise around derivatives and like how to do a lot of these things, it’s there in the world. It’s just so fascinating to me that as you described this, it just seems like there’s so much reinforcing behavior from a technological standpoint that only makes this thing stronger and stronger in a naturally occurring way.

[01:08:47] Preston Pysh: Almost like as you would see nature unfold, when you see such complexity just manifest itself on top of itself. It’s strange, it’s fascinating. It’s, yeah, it’s indescribable and in a really strange, weird way. 

[01:09:06] Bob Burnett: Yeah. It’s why not to get too deep philosophically or whatever, but I think a lot of times people in the sciences and I would consider myself on the periphery of that.

[01:09:18] Bob Burnett: They go through these phases, from a religious standpoint. I’m not here to profess any specific religious, but you go through a period where often people in the mass and the sciences they lose their faith and then it comes back later in life the deeper they get. Like you start studying and I just as a hobby, I like to study the universe and like physics and things like that.

[01:09:40] Bob Burnett: And that’s my path is I became, it should became more, more spiritual, more belief and a higher power. When I, the more that I saw this stuff, and I’ll go back to, I believe Bitcoin is divinely inspired. We should not worship it. At least don’t take it that way. But I, yeah, there’s just so many things like you said, like this, it’s miraculous.

[01:10:00] Bob Burnett: That one. Excuse me. It’s miraculous. It’s, yeah it is fantastic. And I’m sitting here, I told you the start of my story in twenty-seventeen deep in the rabbit hole. And still learning these things, still having these revelations, hopefully doing something to make it better. I always, I say for me and my company I try to live the ethos.

[01:10:27] Bob Burnett: I try to do what’s best for Bitcoin in the belief that ultimately it will be the best thing for me and my family. And that’s why, like on this derivative product, I should say too, I am actively working with a company ironically, called Block Spaces out of Tampa to develop a product to do that.

[01:10:47] Bob Burnett: And I’m sure others will look in similar they’re already derivatives in like obviously Bitcoin and hash price and things like that. But the difference with this one, so I think it ultimately will become the most important, is that the need exists on both sides. Yeah. Hash power derivatives or hash price derivatives, excuse me.

[01:11:07] Bob Burnett: There’s really not a, somebody on the other side of it. The other side of it is speculators. So the miners need it. There’s a need for the miner to say I want to protect my investment. I want to protect my output. But there’s not somebody on the other side who had the same dependency, but in the price, in the case of block space, that it, that does, there is both a producer and a consumer.

[01:11:32] Bob Burnett: Yeah. And so I believe ultimately that’s what drives this to become the single most important derivative product Wow. In our space. Absolutely fascinating. 

[01:11:42] Preston Pysh: Bob, I could literally talk to you all day. This was exactly what I knew this conversation was gonna be. I’m just learning a ton every time I get around you, I just, I personally get inspired from just your background, the expertise that you bring, and just how thoughtful you are from a very first principal’s standpoint.

[01:12:02] Preston Pysh: Can’t thank you enough for making time to come on. You mentioned a couple things that we will have the, in the show notes of the episode. Is there anything else that you want to point people towards that we can put into the show notes? 

[01:12:14] Bob Burnett: I’m at Twitter boomer underscore BTC flip behind me.

[01:12:18] Bob Burnett: This is Low. I do have a little show of my own called Old Man Yells, where I go on monologue rips of just me just ranting about something. So that’s on YouTube and Spotify and places like that. But I always enjoy my time with you, Preston. I’m really happy that we got a chance to do this.

[01:12:35] Bob Burnett: Thanks so much for having me. 

[01:12:37] Preston Pysh: Absolute pleasure. Thank you Bob. And for folks that checking out the show be sure to look at the show notes and click on some of the links that we mentioned there and see what Bob’s up to. So thank you Bob, and we’ll chat again soon. Thank you.

[01:12:57] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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