If you’ve read the news lately or even quickly skimmed the headlines, you’ve seen the madness concerning FTX and the growing skepticism of the crypto industry at large.
The collapse of FTX and other firms this year bolstered by concerns of crypto mining strain on the world’s resources, there have been many misunderstandings, it seems. Especially as it relates to Bitcoin.
Recently, you may have heard CEO John Belizaire say, “Bitcoin is not crypto,” and he is not alone in this thought. Many thought leaders and Bitcoiners have taken to Twitter and op-eds to expand on this:
Bitcoin is not crypto. (At least not the version of Crypto FTX was built on.)
“And what does that mean?” You’re probably thinking.
In this episode, John Belizaire is joined today by colleagues, Dip Patel, CTO of Soluna, and Phillip Ng, Vice President of Corporate Development at Soluna.
They discuss what’s going on in the market, and try to clarify a few things to help you, our listeners, understand how and why Bitcoin is not crypto.
[02:15] First things first, what the heck happened? We woke up one day and there were suspicious Twitter threads, drama, and finally a collapse. How would you explain the FTX situation to a novice?
Phillip Ng: I would explain it as winding back further to set the scene. 2020, you have COVID and what’s followed is the most incredible economic stimulus and monetary stimulus that we’ve seen in history. The financial crisis in ’08, the conclusion, the criticism that policymakers took away was that they did not do enough, quick enough to really stave off the economic malaise that followed. In contrast, in 2020, you have something that’s slightly different. You have an event that’s not political, there’s no one to blame, it’s a pandemic. There was a lot of support to put a lot of capital into the system. The repeated theme was, “Let’s overshoot, not undershoot.” And so what you see is an incredible expansion of money supply, an incredible amount of money going into people’s pockets, and a real euphoria in all asset classes from real estate, crypto, and traditional businesses.
As a result, as what frequently happens and what we talked about two years ago or three years ago now, when we were in the last crypto winter, the crypto economy is happy to manufacture as many financial products as people will buy.
[04:30] So you see the rise of projects like LUNA, which are really nonsensical like, “We’re going to pay you 20% APR to deposit your money with us.” It’s just not realistic for a demand deposit when interest rates are at zero, and you see these other lending platforms come out and really come into a big way, supplemented with a large number of retail investors who are pushing money into these platforms.
And similar to how the financial crisis happens, inevitably what happens is these firms are lending money back and forth to each other and it creates a systematic risk. So in May, when it was clear that the Fed was going to begin interest rate rising and enter into a period of discipline, a lot of that liquidity began to dissipate. Then, what you actually see is the first domino to fall is LUNA and Terra, and then that was followed by a series of other projects, Three Arrows, and Celsius, and then a variety of others that have followed since then.
Throughout the whole episode, you have FTX sitting on the sidelines and they’re really looking like this really sophisticated player, they’re bailing out players.
[06:00] SBF is talking about risk management and how his background in these exotic or specialized hedge funds will really allow him to navigate these waters. People are calling him sort of the JP Morgan of crypto, able to bail out people in a time of economic uncertainty. Rewind or fast forward to about a month ago, and suddenly what you see is rumors about FTX having problems, and withdrawals.
SBF, the CEO of FTX, gets in a fight with the CEO of Binance. Then suddenly there’s this run on the FTX token. Then literally within, I think 72 hours later, FTX announced that they are being acquired by Binance as a move to save depositors. 24 hours after that, that deal’s dead, and FTX is headed for bankruptcy. That’s sort of where we’re at today.
John Belizaire: Yeah, that’s a great tour. So when I play that back, what you basically said is you have this huge sort of global event, the pandemic, it brings the global economy to a screeching halt to help address that massive amounts of quantitative support come into the system. Essentially, governments print lots of money, that money goes into the economy, lands in people’s hands, and they’re looking for places where they can generate returns on it. It’s like free money, you want to not just party with it, but you want to maybe invest it in some things to turn it into money. I remember lots of interesting memes showing up on social media where people would throw money under a door and more money comes out kind of thing. It has been said, in hard times new businesses get formed and all these new types of businesses get formed to provide yield and returns because that’s what people are looking for, and a number of these companies get formed.
Fast-forward a couple of years later, you’re having some very massive collapsing of these companies because of the intertwining nature, interrelated nature of the transactions they were doing. People start to raise questions as to whether the structures of those businesses were sound and whether there was some fraudulent activity happening in that space. I have to say, this sounds very familiar to where we were four years ago. 2018, we were launching a business and there was a collapse in the crypto space and there was just a lot of weird stuff happening. Don’t you remember that, Dip?
Dip Patel: [09:00] Yeah, absolutely. Well, as Phil mentioned, when times are good, it seems like any product out there, people think they’re a genius, they pat their own back and they make a lot of money. And I’m on a bunch of crypto chats, subreddits, and Twitter, like Phil. It was exactly like he said, you kind of see the signals pop in these really interesting communities and it’s like, “Hey, what’s going on over here? Something doesn’t make sense.” Then you kind of see it slowly catch fire. And I think back then when things started going bad for companies, even though the companies were smaller, it took a long time to see these things happen.
With FTX, they raised so much money so fast, and then it exploded. Some could say, “All right, if you were paying attention, the fraud was obvious.” But a lot of smart people were paying attention, it looked like, and they did a good job of hiding it, evidently. These are not dumb funds, the people that invested in FTX.
So the question is, how did all these diligent people miss this?
I think it’s driven by… Well, the other thing that these crypto chats were is everyone’s a genius investor like, “Oh, look what I did. This token, I made 20% last week. Oh, I made more this year trading crypto than I do at my real job. Maybe I’ll just quit.” … And everyone thought that they were the next genius.
I still have money tied up in Ethereum too, staking, and I don’t know if I’ll ever see that money again, so I’m not immune either.
John Belizaire: Yeah. It’s funny because there seems to be a pattern, this isn’t the first crypto winter or crypto frost that’s happening. I wonder if there are lessons to be learned from these collapses and what just a general downturn in the industry means more broadly for the industry. I have a perspective, I don’t want to taint you guys, but working backward, how would you describe to a potential new investor who’s saying, “Nah, I’m not going to invest in this thing anymore, this is all charlatan,” probably the same investor that said that four years ago and came back into the market?
[12:00] What’s the next market going to look like? What should people expect? And what do you say to them that should be learned here?
Phillip Ng: I think if you rewind back the clock to 2018 and you think about where Bitcoin, crypto, and flexible data centers are from now till then, it is almost incredible actually how much progress has been made through the cycle. The cycle is the noise and the signal is what’s transpired over the last four years.
So you have virtually every major investing platform has access to Bitcoin now, so anyone can own Bitcoin, at least in the United States if they choose to do so. I remember in 2018 if you tried to wire money to Coinbase to fund your account, certain financial institutions would just reject the wire because they didn’t want to be facilitating crypto transactions. Now you can buy crypto on Robinhood, interactive brokers, you name it, you can trade it. Accessibility has increased immensely both on the purchasing side and on the payment side if you want to pay in crypto.
On the data center side, when we were fundraising in 2018, a lot of our initial pitch was, “What is Bitcoin? What is crypto? What are these things?” Basic concepts.
Now I would say while people may not claim to be experts in this thing, everyone is fairly fluent in what a digital currency is, what the difference between blockchain and cryptocurrency is, and those kinds of things. There’s a basic understanding [of Bitcoin] in the corporate consciousness that exists.
[14:00] Beyond that, if you narrow into our side of the universe, these tier-zero data centers, billions of dollars have been raised to pursue this. Something like $5 billion was deployed in 2021 to pursue the thesis of flexible data centers focused on crypto and other types of tasks. It’s going to be part of the energy market, large utilities, or designing programs to allow for this type of load.
Power producers are thinking about how they can build renewable assets with this type of load to improve their economics. Of course, we would be remiss to not talk about the impact of the infrastructure bill and how much of an explosion intermittent generation will be in the United States over the next 30 years, and how important flexible loads will be to part of solving that problem.
So if you look overall, taking out the boom-bust cycle, it really looks like an industry that’s maturing, adapting, being adopted, and will persist. I think the next question that follows is what changes need to be made to the business models to allow for returns to shareholders, which hasn’t been accomplished by many firms yet.
John Belizaire: I think that’s a great perspective. I would add that maturity accelerates every cycle. I think that the point you made about the ubiquity of knowledge around the space is clear, mainstream media really talks about this stuff as it’s just a thing now, a remark around the fact that now when you look at the stock tickers, they also show you the big cryptos, they show you Bitcoin price in the ticker because it’s just part of the financial system at this point, which the fact that it’s less than 15 years old is pretty impressive for the technology to have achieved that level.
[16:00] I agree that the business models are evolving, there are lots of interesting things that have been tried here over the last few years. Everything from tokenization V1, tokenization V2, to decentralize exchanges to traditional exchanges, but all digital assets and the dangers with lack of regulation.
All of that I think is going to culminate into maturing more involvement by the government to regulate the aspects of crypto that are more attuned to securities. Looking at things like Bitcoin, for example, which is generally perceived by at least the SEC as a commodity, is a technology that has a tremendous amount of potential. I think it’s important to say that Bitcoin is not crypto, it’s important for folks to understand this now probably more than ever, to decouple Bitcoin from the broader seemingly negative crypto discourse. I think that the question is that people want to understand what makes Bitcoin different from or more than crypto.
Dip Patel: Yeah. I’m giggling a little because there are always these pundits, I don’t know if that’s the right word, but there are these critics who are like, “But Bitcoin is slow.” It’s like, “No kidding.”
[17:30] Every single new technology has massive problems. Plasma TVs when they came out were like 50 grand and had burned in two hours, and they got super hot and consumed a kilowatt. There were so many issues, but now they’re $20 and you get a 60-inch TV that’s LCD. I think with Bitcoin, what I always say is that its water. There are all these beverages out there, there’s beer, there’s wine, there’s juice, there’s tea, there’s matcha, there’s all this great stuff. And they all have their value and they all present some difference that water lacks, flavor, caffeine, whatever. But they all come at a cost, and usually, that cost is either centralization in the name of creating, “efficiency in energy use.”
[18:30] So, it’s either centralization or it’s through some other random value proposition that has nothing to do with speed like NFTs or whatever.
“When it comes to Bitcoin, the reason it’s so awesome and the reason it’s unique, and the reason that it is, in my opinion, the only true deployment of what blockchain is supposed to be, is that it’s decentralized by physics, not through trusting a human being.” – Dip Patel, CTO
For almost every other one of these new, call them proof-of-stake style coins, or these other applications of blockchain for cryptocurrency, you’re effectively creating a bank, you’re just trusting a different group of people. I mean, literally, everybody has lost their mind–Elon, Kanye. Who can you trust to not lose their mind when they achieve a billion dollars or insane amounts of money? Everybody does, except for energy use. It’s pretty straightforward.
So when you look at Bitcoin, it’s physics and math that drive it. It’s exceptionally well understood. And just like water, it’s got flaws, but none of those flaws are toxic or fundamental problems, they’re just limitations in water that can be fixed in other ways.
The lightning network is a really good example of a way of speeding up Bitcoin with a limited amount of centralization because you’re now operating on a set of exchanges or a set of participants, but it’s still basically decentralized, there’s no SBF, and his group of buddies pulling the strings behind the scenes.
John Belizaire: There’s a recent Bitcoin Magazine opinion piece that came out by Tim Niemeyer. He summed it up really well. He said, “The overwhelming problem with the cryptocurrency sphere, and that is defined as everything other than Bitcoin, is that it’s still largely based on an expectation of trust.”
There are just countless other scams out there and Ponzis that are sewn into the fabric of the cryptocurrency industry. Continuing to quote him, “It’s clear that having centralized entities controlling your value requires you trust the valuable seamstresses and their incentives.”
I mean, he’s basically saying that as much as these are Web3 and supposed to be decentralized, they’re very much centralized in their design. That’s probably why there’s all this potential for schemes or scams to be incorporated into the design if you will.
[22:00] Phil, you spent time with IPPs and power plant owners as focusing on a lot of our origination work. I know you made mention of a conversation you had with one that did sort of a first principles look at the space and said, “What should we believe about this space now and its relationship to Bitcoin and the potential for this to address our wasted energy problems?” Could you share a bit about how that conversation went?
Phillip Ng: Yeah. So I was catching up with an IPP, this is literally two days after FTX blew up, and you’re looking at a 25% decline in asset prices when the overall S&P is surging like 6% on that day. And the conversation was, “Hey, are you guys still in the game? Do you still want to do this?” The answer is yes. They said, “How do you look at all this FTX stuff that’s happening?”
What we have said and what our perspective is we’re monetizing energy with computing. It starts with Bitcoin, we want to go into other avenues, HPC over time, but in the near term it’s Bitcoin and Bitcoin is unaffected.
[23:20] Bitcoin still needs gigawatts of power to secure the network. We would like that power to be green, we would like to use power that couldn’t otherwise be sold. And for this demand to go to zero, literally everyone would have to stop using this.
So our thought was, “Look, this is Bitcoin. If you guys think Bitcoin’s going somewhere, then you need to reevaluate. If you don’t, then we should try to move forward.” The sense that we got from them was they said, “Yeah, we think Bitcoin is still going to be around and it was a helpful context.” So it was surprising to hear these guys who I wouldn’t describe as crypto technologists in that regard by any means saying “Yeah, I don’t think Bitcoin’s going anywhere.” It’s part of the consciousness.
John Belizaire: Now, Bitcoin consumes a lot of energy and we know this, we’ve talked about the Bitcoin energy debate in great length across our podcast, blog, and white papers.
[24:50] Briefly, can you explain why Bitcoin is so energy intensive?
Dip Patel: Yeah, basically because it’s designed to be.
The idea is you solve this puzzle and the puzzle is as difficult as it takes all the computers trying to solve it in 10 minutes. So, the more computers that come online, the more difficult the puzzle. The more difficult the puzzle, the more energy it takes to solve it.
[25:20] Now, you solve that energy problem by making more efficient chips, but that doesn’t solve the problem here because it just gives people more computers. It’s still an arms race. But what it does do is create a tremendous amount of security because the only way to influence the Bitcoin network is if you get 51% of that power, of that computing, under your kind of control, then you could start doing whatever you want. There were times when we started this company when some of these exchanges were getting pretty close, it was scary.
If the Bitcoin network only required $100 billion to get 51% of the network, then you could go raise that money and deploy $100 billion in cash and take control of a trillion-dollar market, but the Bitcoin network requires energy and it needs chips. Those are things that money itself isn’t enough. You need lots of time, you need connections, and you need contracts with IPPs, as Phil’s been describing.
What this creates is a highly resilient, decentralized network that is really hard to get 51% of, which makes the network effectively unhackable. I mean, we saw China shut down 30% of the network and there were no major hacks, there were no issues. In three months the network was back to full strength.
[27:30] To me, if that isn’t elegant, I don’t know what is. Then as we’ve talked about so much, that energy use as a feature–the only one that hurts is oil. So, if you really think about it, the only one that it hurts to use Bitcoin as the solution for this curtailment problem with green energy is big banks and oil. Maybe we should pay attention to the critics a little closer, and who’s backing the critics.
John Belizaire: Exactly. We see Bitcoin’s energy use as an opportunity to address two critical problems that are slowing the growth of clean energy development and adoption: wasted energy and grid inflexibility. How would you describe Bitcoin solving these problems, Phil?
[28:10] What’s your pitch to renewable energy developers, and power plant owners? How do you position building a bitcoin data center co-located with their facilities and how it addresses their issues?
Phillip Ng: It’s pretty simple. When you produce power, you need to sell power and you can sell it to basically three options. Most conventionally, you sell it to the grid through the grid to users on the grid system. Renewable assets are challenged in so far as their generation co-varies. So if you have zero marginal cost, when you’re bidding at zero, everybody else is bidding at zero. What happens is there’s a rush of renewable energy that tries to get on the grid all at once, it has not have enough users to fully absorb that amount. So as much as a third of renewable energy can be wasted depending on the season and the geography that we’re talking about. That is a tremendous untapped resource and it is a tremendous drag on financial returns to renewable power plants.
To solve that problem, you could sell that electricity to something locally or you could put it into a battery. Batteries have some technology challenges. Selling it locally, right now we believe data centers are the best customers. They’re energy dense, they’re very hungry for power, and there’s such a demand for them.
Specifically, within the category of data centers, we’re talking about Bitcoin as your customer. The reason is, it is much less complicated to manage and is much more tolerant of variability in production, which is to say, if you’re willing to provide security to the network, you will be paid as long as you’re securing the network. As soon as you stop, you’ll stop being paid. That’s just fine for the network.
Really the benefit and the value proposition of Bitcoin as a customer is it is your beachhead customer that doesn’t care where you are, what your latency is, what your uptime is, or what your availability is. As long as you’re on, they’ll pay you. You don’t need a contract, you don’t need a sales cycle. Then when you have the infrastructure bill, the idea is you can go backward and replace that with other customers over time.
John Belizaire: Right, that’s great. I can see why our pipeline has grown the way it has!
[31:20] What prediction for the coming year would you like to see, would you love to see, I would say? And it could be anything, but what would you like to see, particularly around this whole crypto space and Bitcoin space?
Dip Patel: I’d like to see more Bitcoin deployments that scale their power on and off to meet the needs of green energy sites. A lot of lip service there, JB. It’d be nice to see more deployments of it.
Phillip Ng: I would like to see the industry as a whole be more honest and transparent about their carbon footprint and their scope, one, and two, emissions. There are some narratives out there that you need a flexible load, so it’s okay if you’re consuming dirty power or cleaner power is better than more dirty power. I think getting people’s arms around how much the carbon footprint is, especially for these public companies, and how much of it is zero carbon energy, just more transparency around that, and more of a cohesive view from the industry of what’s right for the planet, that’s the intellectual rigor that we still haven’t fully seen in the space.
John Belizaire: That’s great. I’ll throw mine into the pot here. For 2023, I’d definitely like to see more integration with renewable energy, greenfield, and brownfield projects where more data centers are deployed and they’re flexible in design. I think the second thing I would say is just an awakening from the enterprise that sustainable IT can be achieved by this approach, putting computing close to renewable energy and integrating it in this very specific way, where it’s at those areas where there’s lots of wasted energy to catalyze more of that energy to be built, but also to catalyze a wave of more green computing coming available for all of these incredible applications, and AI, and all of these big sort of data-oriented uses of computing that today, one might argue subsidize fossil fuels because they’re living in 24/7 facilities.
If we can put them in these modular, flexible facilities, we can solve so many problems all at once. It’s kind of like a trifecta of interesting innovations that could change the world. That’s what I’d like to see happen in 2023.
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