Welcome back to value stack. It's been a little while. As you can see, we've upgraded our
set.
Yes. Yeah. I think last time I recorded it was like February. So we're like 30, 40 K and
60 now. If you're not familiar, this is Jameson Lopp. He's a bitcoiner. Would you, would
you describe yourself as a bitcoiner?
Cypherpunk, bitcoiner, nerd.
What, uh, what are we going to want to talk about in this episode? You said that there
were some interesting things going on both on Bitcoin mainnet, but also in Bitcoin test.
Yeah. I mean, there's a lot of stuff. We could talk about technical developments. We could
talk about my attack on test net. We could talk about a variety of government attacks
that are happening just last week.
Yeah, I love that. So let's start. Let's use this theme as the attacks. There's attacks
on us from everywhere. And maybe you're participating in some of them. Let's start a test net.
So you were explaining yesterday to me that the testnet needs to be reset. Can you give
me an idea, just a short like summary of why that is and how you came to that conclusion
about it as well?
Sure. So, you know, what is test network? It is a network that is not Bitcoin. It is
separate from Bitcoin, but it is almost exactly the same as the Bitcoin protocol. And the
entire premise of testnet is to have a network that is basically exactly like Bitcoin, but
it has no value. So, you know, we want developers to be able to experiment and build and innovate
and do stuff on Bitcoin without having to pay for the privilege of doing so and to be
able to do so and take risks, you know, without having to potentially lose a lot of money.
So one of the problems that has compounded as a result of several other things is that
now testnet is in a state where testnet Bitcoin is scarce. It is very hard to get.
And as a result, it has accrued value and there are actual markets where people are
buying and selling these testnet coins. That's not great for developers. You shouldn't have
developers needing to go out and buy these other tokens.
So let me ask you, so why, how did we get here where like testnet tokens became so
scarce to where they eventually started becoming valuable in some people's eyes? Like how did
that concentration allocation happen?
So at the moment, testnet is like at block height 2.6 million something, which is equivalent
to the year 2057, if we were thinking in main net terms, in terms of like assuming 10 minute
block times or so on. And the reason that we are at that block height is that there
are some eccentricities to testnet that allow you to create blocks at a very low difficulty.
And this is basically just to ensure that blocks are continually coming into test net.
But that combined with what you could call a bug or an assumption in the difficulty adjustment
logic means that every once in a while, the mining difficulty on testnet gets permanently
reset to the minimum level of one. And this creates a phenomenon that I termed block storms
back in 2015 or so, which is basically you end up having 10 to 20,000 blocks get produced
in a single day.
When's the last time that's happened?
Well, it's funny, you should ask. Normally, that happens at a I did some number crunching
on the testnet blockchain. Normally, that only happens 12% of the difficulty adjustments,
which is I think twice a year under normal conditions. And the reason for the 12% is
that the minimum difficulty mining rule on testnet requires that you go 20 minutes without
mining a block. And if you look at the Poisson distribution of mining a block, then around
12% of blocks should take longer than 20 minutes. And so that means 12% of blocks on testnet hit
that rule. And therefore, every once in a while, 12% of the difficulty adjustments
happen to hit that same rule edge case. And this is where there's the assumption and the difficulty
adjustment logic where it only looks at the difficulty target of the previous block. And
it assumes that that was the difficulty target for the entire 2016 testnet only assumption.
That's on main net too. But that's like that's a correct assumption on main net because main net
doesn't have this weird rule that allows you to do low difficulty blocks.
But whenever that, you know, that low difficulty block stuff got coded into the test net,
you know, it was just overlooked. And this block storm phenomenon resulted. So
as a result, the rewards for a block I think are like 0.1 or 0.01 testnet coins. So there's
not a very good distribution of coins happening even to people who are mining on testnet these
days contributes further to the scarcity. And also it's been 13 years, we're currently on the
third iteration of test net, but we've been on it for 13 years. And so people have started to
operate under the assumption I think that testnet is a decently stable platform that you can
actually do stuff of real economic value on. And so I set out to prove them otherwise.
And so do you think that this will be reset? And is this an inevitable, I mean,
I looked at the mem pool of the of the test and a bar training, it looks
outrageous compared to the historical. So does this is this coordination of resetting test
net that you're in favor of? Is it succeeding in your view so far? So I've essentially been
griefing testnet by exploiting some of these edge case rules and flooding the network and
triggering these conditions, just to make it annoying for some people who are too reliant upon
testnet being like a stable network. And the whole idea behind that is just to hammer on the
points of what I set out in my email to the development mailing list, in which I also said
we should fix this weird edge case that causes block storms. So suffice to say that for the
past week or so, Bitcoin testnet has been in a perpetual state of block storms, because I'm
running some some scripts and some demons that are triggering these block storms at every possible
point. The man who killed test net, you know, I can't I can't kill test net, but I can make it
very annoying to use. And so several of the projects essentially became unusable because
they're back in infrastructure couldn't handle the deluge. And so do you feel like there's,
I mean, like any ethical reasons why you shouldn't do this or better, better,
I'm sure you considered the ethical reasons why you shouldn't do this. Why did you ultimately
decide that it was worth it? Given that some people were valuing this at real
money, some people have gotten very upset and said that I've been like tampering and
destroying with their property or whatever. But this is crypto anarchy. I am following the rules
of the network. It's not my fault that they're so ignorant that they didn't understand the rules.
And it's not like you are using this loophole or vulnerability to your financial gain. In fact,
you're sounded the alarm about it so that testnet can become usable and better serve its purpose
for developers, right? That's the whole point of it was to reset it. So it's not 0.01. And so that
people who need to need it don't have to actually spend real value to pretty much. I suspect that
if I wanted to put enough time and effort in, I could probably find some weaknesses in some of
these projects and try to get some sort of financial gain out of it. But I'm not at that point.
And it's probably not like that much value that's actually occurring on there.
Do you think that, I mean, what's like a timeline of what we can expect or what you might guess?
I think the best case scenario is that we can basically get the next version of Bitcoin Core
and other major client implementations out there to update their definition of test nets. So
what do you do? Essentially, you have to mint a new Genesis block and that gets hardcoded into
the client software. And so then when you start up your node and you pass at the testnet flag,
it just joins this new network with this new Genesis block. And we essentially start over
from scratch. From every other perspective, it'll work like Bitcoin mainnet does today,
although the subsidy will be different. I guess it's different now, right? Yeah, well, I mean,
the subsidy schedule is the same. And of course, that's only based upon block height, how many
blocks have happened on the network. Are there any implementations in Bitcoin testnet that don't
exist in Bitcoin Core aside from the reset that you mentioned about the difficulty adjustment?
Like is it code for code mirror or otherwise? Yeah, as far as I'm aware, everything else is
exactly the same. You know, transaction construction, all of the different features that have been soft
forked in over the years. And so, and just to reiterate, did the block storm vulnerability
that was discovered, the difficulty adjustment, this was an intentional thing that was done,
initially to make it make sure that developers could get testnet
coins distributed. Well, the minimum difficulty rule was on purpose. That's what was unintentional,
I think was this edge case that caused the permanent difficulty reset edge case that is what
I've been exploiting recently. Okay, but that's easy to fix. That's like a one line code fix.
And so it was the plan like a path forward here just to essentially reset the testnet
with software and fix that line of code. I think so. And then start at 50. Why couldn't we start at
I guess there's probably a reason we couldn't start at the current block height.
Because it would have to it would. Yeah, I mean, you have to start over from Genesis. And then,
you know, there have been people suggesting other changes on the developer mailing list thread.
But ultimately, it turns into a debate between, you know, do we prefer to have testnet be different
in this way, because it's better for developers, or do we prefer for it to be as close as possible
to the main network, and then just instill an ethos of resetting the whole testnet more frequently
to make sure that it doesn't accrue value. I kind of have a thesis at this point that
if a test network goes on long enough and is used and developed on long enough,
it's probably inevitable that it will start to accrue value, especially if those tokens start
to become scarce. Yeah. Yeah. Good point. Good point. Well, let's see, I think we hit that one
enough. What about some of the other things going on on mainnet right now? I mean, we just had the
having and with that, the runes protocol is going on. And we saw, you know, speaking of mining
block storms, it was like the opposite. I mean, it was the only storm was the transaction fees
that occurred. What, what do you think about the current state of hash rate, mining health,
and maybe Bitcoin as a result of that, you know, take it in any direction that you want.
Yeah, I mean, the the hash rate and distribution amongst pools has been too centralized,
I think for a long time. So the the bright side of what happened recently, I thought it was pretty
cool that we went for 104 blocks straight, in which we showed that fees were exceeding subsidy. So
this is just an interesting proof that it is possible for the economics of block space to
become sustainable. At least for a longer term than we've seen before, it's usually only been
one or two blocks before and say 104, you know, that's three quarters of a day. Obviously, we
want to get to a sort of perpetually sustainable state, but that may take another having or it
may take just, you know, new use cases bringing more and more demand for block space to the network.
Hash rate centralization is a tricky thing. I think what we've seen from people who have been
analyzing, for example, the different block templates amongst different mining pools,
and actually looking at the flows of the coin base outputs, like the newly mined coins,
and a lot of them seem to be going to the same custodian. There's some kind of fishy stuff
going on there. You know, I've also heard that a number of these mining pools are basically just
fronts for bit mains, you know, ant pool. So I think they're operating under a different name.
But yeah, I think there's some further fishy stuff going on there. And, you know, I was actually at
MIT Bitcoin Expo just a few days ago, and there was a mining panel. And I asked the,
I think it was Galaxy and one of the other like Hut 8, you know, leaders on stage. I asked them,
you know, why don't you run your own mining pool? You know, the common reason that we usually hear
of why people don't run their own mining pool, or just mine solo is because of variance, right?
Is if you have a really low percentage of global hash rate, and you would basically never meant to
block, then it doesn't make sense to do solo mining. But if you're one of these big companies that has
like a percentage, like 1% or more of the network hash rate, then you should be getting, you know,
payouts daily, you know, on average, of course, there's still going to be a variance. That seems
like low enough variance to me for a company and enterprise to be able to handle. But
that was not the response that I got. And in fact, it was basically posed that
the cost of outsourcing to a third party mining pool is a rounding error for these big miners.
And that they see it as, you know, if we were running our own infrastructure, then
that's going to be a bigger cost center. And we might screw it up like we don't trust ourselves
type of thing. I think someone brought up separately in a different conversation that I think
Marathon does run their own mining pool. And I think there have been one or two incidents where
they screwed up and like mind an invalid block. And, you know, that probably cost them far more
than it would have if they had outsourced to a third party. So it's an interesting, you know,
I guess risk analysis and cost analysis for these miners, which is it's not great.
You know, potentially a way of mitigating that would be if we could get more of these
mining pools to update to use stratum v2. So for me, the problem is not so much that you're
just outsourcing to a third party miner. You know, it kind of makes sense that
these pools are specializing in running the software. So I've been learning more about
running pool software as a result of my testnet attacks, because I have some potential other
future plans there. And it's actually, it was not even for like Uber, Bitcoin,
nerd like me, it has not been easy to get a stratum server up and running. I've tried like
three different stratum server software options and couldn't even get them to work. And then I've
started playing around with some of the stratum v2 stuff and been able to get it to work for like
a minute or two before stuff crashes. So I can understand why it could be a pain to, you know,
run your own stratum pool if you're not, you know, dedicating resources to this. So coming back
around to like, what is the actual problem? The real problem is that you're outsourcing
the block template generation. Is this a new source of revenue for miners? I've no
mirrors pools been doing some stuff like that. Well, you know, you're, you're hoping that the
miner is smart enough to optimize what transactions they're selecting from the mem pool. And that's
usually pretty straightforward. Though some, some people are getting more sophisticated in their
strategies for, you know, mem pool transaction selection. But there's a couple of risks that
I'm not sure that these big companies are really thinking about. So first of all, there's a custodial
risk. Because the coinbase output is not going to be going to your wallet. It's going to be going
to a wallet owned by the pool. And then, you know, you have to wait 100 blocks for it to mature. And
then hopefully it gets moved, you know, to an address that you can control. Another thing that
might be more concerning because it's less obvious and it's probably even harder to prove
is that if you have a third party that is generating the block template,
they could be accepting out of band transaction fees and not passing those along to you. So,
you know, they could be adding a bunch of transactions into a block that are actually
paying fairly low fees on chain, and then they're getting paid via some other method.
So the person who's mining to the pool is not getting their share. The pool operator is getting
all of that, what they're getting paid out of band. Yeah. And you wouldn't be able to know that
you're getting ripped off because those fees aren't showing up in the block. Wow. Okay. And that,
is that something fairly new that it didn't exist some time ago? Oh, it has existed for a long time.
I think it's just become more common practice. Yeah, I know that at least as early as I was
like working full time in the industry back in 2015, there were pools that had private APIs that
you could push transactions to. And sometimes there would be out of band fees required. Sometimes
it was just basically doing a favor. Is this just happening and people caring about it now
because of ordinals, and there's this application and significantly more value
in doing like a block template, templating in a certain way. Is that why people are all of a
sudden concerned about this? Why is it part of the conversation on Twitter and all now?
I'm sure there's a variety of reasons that one of the more common ones for doing the out of band
stuff is people who are pushing nonstandard transactions. And people who are increasing.
It seems to be, it's just like there's more people experimenting with what you might call
metaprotocols or inscriptions that are too complex to be relayed through the Bitcoin network
because the default node policies would reject them and not pass them on. What about
the some of the BIPs that have been recently assigned new numbers like OPCat, TX, Hash Verify?
How do you see those fitting in? Do you think they, I know at least in the case of OPCat,
it existed at one point? What's your stance on that? And can you help explain to someone who
maybe understands Bitcoin but isn't a developer like how these might impact a user if they are or
are not approved and ushered in? Yeah, these are fairly new developments. It's just nice to see
more discussion happening about actual like base protocol level improvements.
Some people are very afraid of any base protocol changes. They're afraid of unknown unknowns.
But as I've said a number of times, like there's unknown unknowns to making changes to protocol
then there's unknown unknowns to not making changes to the protocol. So I don't really see that as a
strong argument. Rather, we just need to be very conservative and thoroughly evaluate all of these
proposals to understand what risks, what trade-offs there are. And I haven't dove extremely deep into
all these different proposals, but the ones that are most interesting to me are those that can
enable side-chain development and second-layer development basically to improve the ability
for us to finally be able to do permissionless two-way pegs between the base chain and second-layer
networks. Are you referencing ARC in that example? I know it requires or benefits from... Yeah, I mean,
it seems like a lot of these second-layer proposals that are out there, whether it's ARC or BitVM.
I think even lightning, it seems like almost every Layer 2 proposal can benefit from some of these
different potential soft fork and new op-codes, but it's really complicated as to which ones benefit
from which ones, what the trade-offs are. But I think we just need to keep talking about it and
get more people experimenting on test nets or SIG nets to actually figure out what are we able
to do with these op-codes and are they safe. So, Opcat is an interesting one because it existed
in the version 0.1 original Bitcoin release. And along with a number of other op-codes, it got
disabled because it was determined that there was some edge case where it was problematic and
like some machines did not evaluate it the same as other machines. So, you know, potential consensus
failure problems. Yeah, okay. But if I recall correctly, I think Opcat got re-enabled on Bitcoin
cash a few years ago. And as far as I'm aware, like nothing terrible has resulted from that.
It just existing in itself. It doesn't need anything to hurt it.
So, I don't know, if someone thinks there's something terrible about Opcat, maybe they should
go destroy Bitcoin cash to prove to us. Is this your next battle? I don't know, Wilson.
Well, they're trying to destroy Americans ability to save and earn a living. And I know Canada also
increased their capital gains tax. And there's some proposals that came out this week from the
Biden administration about the long-term capital gains basically. And the unrealized capital gains.
Unrealized and the really crazy one. Yeah. So, I think it was like if you have a million dollars
and income over the year, your long-term is considered short-term basically or something
like that. Great. And then the rate and then you go, stay taxed on top of that. And then the
unrealized gains. And they did say the unrealized gains portion would be assessed towards future
realized gains deductions. But just remember that, you know, every year the money's worthless. So,
your, you know, deduction is also worthless. Remember that because they're nominal, right?
What do you think about like, what's going on with America? Like we had, you know, at one point we had
in the beginning of the year, a few months ago, we had the Bitcoin ETF and everybody's kind of
like, oh, we finally made it. We're legit. And then now the, oh, you know, regulate me harder,
daddy, right? And that's what I think we're starting to see now is the other side of it.
Like people are sort of like, wait a second, like the government is actually,
they're not just going to let this go fly by night. What's your take on what's going on?
We're seeing so many privacy crackdowns. Yeah. Samurai is another thing.
Yeah. You know, both inside and outside of crypto ecosystem stuff, right? So just a month or so ago,
I published an essay about the Corporate Transparency Act, which was passed, and I think 2020 or 2021
with the National Defense Authorization Bill. And basically that's stripping away a lot of the
privacy that is afforded to us through corporations, which is something that myself and I suspect many
other people in America use to help protect the privacy of their assets. Basically, you set up
a corporation such that the true owners of the corporation are not publicly listed. And then
you use that corporation to purchase real assets, aka real estate vehicles, things that have to be
publicly registered and create public records of ownership. And so Finsen is basically starting
to require that all of these corporations file paperwork with Finsen to report all of those
non-public owners. And as far as I can tell, all this information is just going into Finsen's database
and it's getting shared with a whole lot of people. And of course, anything that's in a database over a
long enough period of time usually tends to get hacked and leaked. So I've been talking to a number
of different attorneys and other people who are in similar situations to try to figure out what we
can do to try to forestall this, because there was actually already a legal challenge to it in which
the federal judge, I think in Alabama, stated that this was an unconstitutional law.
Unfortunately, the result of that judgment only applied to the like 200,000 businesses that were
part of this trade association that sued Finsen or Department of Treasury or whatever. And so
that's weird. It's like everybody else. Finsen has said that it's still going to move forward
with enforcing this unconstitutional law. So I'm trying to figure out how do we
challenge this in such a way that it actually applies to all businesses in America? Because
there's, I want to say, millions of corporations that are going to be subject to this.
This is the BOI beneficial ownership interest document. Yeah. I saw that when we were founding
the space, that was something that we had to do. It was list the actual end ownership,
even if it was just a nonprofit entity or for profit didn't matter. So there's an attack on our
privacy. I think there's some sort of attack on our livelihood. You know, we're getting
unrealized. Talk about the unrealized inflation, unrealized taxation and how that
is a form of penalty through government inflation. Like it's like we, it's not even real gains,
right? It's just penalizing. Yeah, that's tough. Like I'm skeptical that that will become a thing
because I just don't think it's feasible to require paying taxes on unrealized gains because
unrealized gains usually are highly illiquid. Right. It's like, if you can't even liquidate the
asset to pay the tax, I don't see how that's the nihilism is like that's their that's the point.
They don't care. They just want to put you in a pickle. So you own nothing and you're happy.
Yeah. So I mean, that would that would result I think in some crazy stuff happening in the
stock market, for example, if you know, founders and C levels of companies that own massive amounts
of equity in their companies are forced to sell like 25% of it, that that would have some massive
ripple effects on Wall Street. So that's like one reason why I don't think it would happen
is because there's so much money and power there that is going to resist and is going to put up
legal battles that I seriously doubt is going to happen. And if it did, it would be so terrible,
like the fallout is going to be crazy. So you don't think it will even if it did get ushered in,
it's going to be hell if they're going to get help back if. Yeah, but so for once you start
looking into wealth management, one of the best kind of advice that I've come across from all the
different books and stuff I've read is that, you know, due to the nature of taxation of capital
gains of assets, the way that you preserve long term wealth and that you end up being successful
is by not selling auto. Yeah, it's and this is like not just for Bitcoin likes this for equities,
real estate, like as many assets as possible, because every time you sell an asset, if you're
going to trade it for something else haircut, yeah, you're taking that hit. So if you're frequently
trading, you're constantly taking hits on those capital gains. And so the institution of an
unrealized capital gain tax would just totally change the game of how people think about anything
long anymore. Yeah, that's what they're doing with the long term and short term being the same too,
where if you're over a million dollar income, your your long term is short term, which then
it's a subject to if it's ordinary income, it's also subject to FICA, Social Security, Medicare,
state income tax. Yeah, so you know, these type of things, I think it's part of the sovereign
individual thesis that all you're really going to do, you're trying to squeeze blood from a stone,
but what's going to happen? I forget the exact same, but you know, the, the, the more strongly
you try to grip it, like the more the sand will come through their fingers or whatever. So so
basically, this is only going to hurt the people on the lower end of the wealth spectrum. The people
for whom it is designed to extract the most value from, they're just going to say,
screw you, I'm going to a different country. You know, they they're the ones who have so much
wealth, they have the mobility to change residency. And this is essentially the sovereign individual
thesis, which is, sure, you know, countries can do that, and they can try to gain more revenue
through taxation. But this is a free market at the nation state level. So other countries are
going to take the opposite approach, and they're going to say, you know what, we're going to offer
you incredibly favorable tax rates in order to get you to bring all of your capital over here.
And, you know, as a result, they're going to start generating a lot more wealth and more capital
in that tax favorable jurisdiction. So it'll be interesting to see how it plays out. You know,
I feel like even this proposal is kind of a last last gasp of a dying empire type of thing.
It seems desperate. You could probably go back in history and see, you know,
similar examples in other empires that were kind of at their peak, and then they started
realizing that they had taken on too much debt, and they were struggling to increase revenue when
what they really should have been doing was decreased spending. But it seems like from a
sort of government bureaucracy perspective, decreasing spending is always a less tenable
proposition. Right. Yeah, and you mentioned the sovereign individual in the fourth turning,
they talk about how these cycles like repeat themselves. He's got the new book. The fourth
turning is here. Would you say we're, you know, sort of in that precipice, you're getting close,
and how do you navigate where, how do you use as like your guide and where we are in that
hyperinflationary last gasp for air? Like how do you know we're getting there and when we get
through it? Yeah, it seems like it, but you know, we don't know if it's going to be next year, five
years, 10 years, 20 years. More based on actions and behaviors and events, things that happen than
time that's passed necessarily, right? Right. So we can see the general trajectory and the best you
can do, I think, is to prepare for some of these worst case scenarios. I mean, it's all prepping
of some sort, right? Whether it's financial prepping or survivalist prepping. Prepping.
Yeah, it's a having year. I mean, you know, there's been a lot of excitement leading up to the
first quarter of the year and the price obviously went kind of crazy at the ETF approval. It seems
like we're in this sort of post high real is it waking back up with a hangover being like, oh, yeah,
there's some problems going on, you know, from a, from a both a code perspective to a privacy
perspective with stuff that happened with samurai and FinCen earlier this year from a squeezing our,
you know, cost of living out from inflationary perspective and interest rates. And so, I mean,
shoot, it's a, you know, you didn't think this was going to be easy? Did you went on? So,
yeah, man, I don't really have much else to cover. I just kind of wanted to do an update with you.
Anything else you want to wrap up?
It seems like, you know, every government agency is going to define
Bitcoin, however, it suits the most to have the greatest claim of jurisdiction over it, right?
So like, you'll, you'll hear one case from the Department of Justice or the FBI or whatever,
and we'll be talking about Bitcoin money laundering, but then you'll, you'll hear, you know, something
else from like the CFTC or the SEC, and it'll be like, no, it's not money. It's an asset.
Therefore, we can tax unrealized gains on it. So it's like, whatever narrative suits them best
at that moment, and that depending on which government and which agenda they're trying to
carry out at that time will be how they'll use their political rhetoric to fit their narrative.
Yeah. And, you know, and like the IRS has started putting more and more questions, it seems,
into their forms. And I don't know, I would, I would suggest that you be honest when filling out
your IRS forms, because you don't want it to come back and bite you in the ass, especially if you
have poor privacy practices, because we've seen that the IRS has no problem doing John Doe summons
like requests, basically, to get extract as much information from centralized custodians as possible.
Yeah. Got to stay alert, stay vigilant.
Jameson Lopp, thank you for sharing your knowledge and hit that subscribe button. We'll see you next time.
See you soon.