Bitcoin’s Seven Layers of Security #2 | The Saylor Series | Episode 15 (WiM059)

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so we're talking about the seven layers

of security and the proof-of-work

network

and the first layer is energy and the

second layer is technology and the third

layer is political

and um in all these cases bitcoin is

becoming more secure more long-lived

because it's co-opting

uh important actors in each of these

three areas

we need a network of politicians

to defend the network

you need a network of technology

providers and semiconductor providers in

order to secure it

we need a network of energy providers to

secure it the fourth area that's

fascinating to me is

the financial

dimension of security of bitcoin

because miners are capital intensive

you need capital

uh to build the mining facilities and to

acquire the rigs and to do the

engineering

so that capital comes from outside the

bitcoin system so it's u.s dollar

capital for the most part

or it's currency equivalence

bitcoin miners therefore are recruiting

a network

of

fiat investors

there's a whole set of conventional

investors

they can't buy bitcoin

or they wouldn't buy bitcoin but they

would buy an operating company

that mines bitcoin

kind of like people that don't want to

own gold but they want to own gold

mining companies

so this is incredibly stabilizing for

the network because

for example

today the news was fidelity had bought

seven percent of marathon

so a big

credible um

traditional investor

i think fidelity has like two trillion

dollars trillions of dollars of capital

and 20 million

customers

and they've been around forever

right that company is now invested in

a bitcoin miner

how does bitcoin benefit well

now you've got hundreds of millions of

dollars to lose if the bitcoin miner

fails and so the investor

has a vested interest in protecting

their interest

and so bitcoin recruits

uh

a whole network of legal

marketing

and political lobbying capability

as it recruits investors

there are trillions and trillions of

dollars

in the conventional economy

that for legal reasons or political

reasons or business reasons or tax

reasons

uh

or practical reasons and technical

they can't buy bitcoin

but they can

buy a security based on bitcoin

so in fact from their point of view

they would prefer to buy the publicly

traded company or

if you're a public company investor

you would prefer to buy a publicly

traded company and if you're a private

investor you prefer to buy the stock of

a privately traded company

and that's just what their pool of

capital does

so

you

if you want to co-opt that financial

network of investors you need a capital

intensive use of proceeds

so bitcoin mining is capital intensive

and proof of work is capital intensive

if i snap my fingers

and i go say the proof of stake and you

don't actually need to buy equipment

and you don't need to engineer the

facility

and you don't need to buy the energy

then you don't need the capital

well then you don't need the investor

then you don't need the investment

banker

then you don't need the market they

trade in

i guess then you don't need the support

of the congressmen the senators and the

regulators they know

and you probably don't need the media

journalists that they talk to

you're losing all of that

right and you're also starting to look

like

you've created your own

different system

okay you created a virtual world

where

the politicians and the media and the

capital and the bankers in the other

world are irrelevant

you created your imaginary world right

and bitcoin

bitcoin mining bridges

the bitcoin universe the you know the

crypto asset of bitcoin with the

physical

and the political universe

and if if money

money is uh

it's socio-economic

energy

well there's two elements that the

energy part says that it needs to be

thermodynamically sound and conservative

and correct

but the social economic part says

you need the politicians

and you need the media and you need the

influencers right

so

the the process by which i construct

bitcoin mining companies is a process of

recruiting the support

of bankers

investors politicians and influencers

as well as technologists

and energy producers

and

that is a virtuous process

that that is actually the hard work you

could think of it is

as when you're building a bitcoin mine

that's the cash and or that's the

foundation upon which you're building

the bridge you know if you ever look at

these bridges that cross the chesapeake

bay they have to dig down and they have

to put in place massive pilings in order

to uh to build

the bridge on top of it so if if the

substructure and the foundation

is weak

then the bridge itself is prone to

collapse right

the bitcoin miners themselves

they do all four of these things and

then and then the fifth thing the fifth

layer of security is the network

itself and

by the network

i'm really referring to the bitcoin

mining centers

every place every place the bitcoin

miners set up their own mining center

they're they're plugging into the energy

grid they're pl they're bringing in the

mining rigs they're engineering them and

suiting them they're getting the

political support

they're raising money

and now the miners themselves have their

own companies

and there's a lot of public companies

and a lot of private companies we'll

have flank a dozen publicly traded

bitcoin miners by the end of the year

but let's say there's hundreds of

private companies

all of these companies are part of the

network of security for bitcoin they all

have skin in the game

they all have invested human capital

financial capital technical capital

energy capital

time

as you can imagine they don't want to

lose that

right they feel pain

and so because they feel pain they don't

want to lose that they invest to protect

that and so how do you invest to protect

a hundred million dollars invested in

bitcoin mining

you're going to contribute to political

campaigns

you're going to hire lawyers you know

there are experts in texas energy law

you're going to hire lobbyists you're

going to hire uh marketing people that

are going to explain why bitcoin is good

for the world not bad for the world

you're going to you're going to hire hr

people to manage all your hr issues

you're going to hire financiers to

report this to the investors

you're going to spend a lot of time

talking to all these constituencies to

make the investors happy

keep the politicians happy

you're going to be an early warning

system uh against mishap like if if

there's

if there's a bug in the software bitcoin

or if there's a bug in the hardware of

bitcoin if you don't trust the mining

rig manufacturer you're gonna push back

if if you think that the software is not

being upgraded fast enough or the the

hardware is not being upgraded fast

enough

to keep the network secure and to

protect your investment you're going to

lobby and agitate

and uh you're going to do that in a

context where

where there's a balance of power between

you

and the node operators the validators

who's a lot right there's a lot of them

and then there's also a balance of power

with bitcoin investors

right if you try to change the number of

bitcoin or you try to change the hash or

try to change the block size you'll

probably have a lot of bitcoin holders

that'll push back on you

um

and then you're going to do it in

balance with your

fiat investors

the people that hold your securities or

the derivatives

and you're going to be

managing the business to try to stay in

alignment with regulations in 100

different jurisdictions

and you're going to be communicating all

the time so

the bitcoin mining network is the fifth

layer of security approved work

and ultimately when you get to a point

where you have 50 well-capitalized

bitcoin miners

and they've got billions of dollars each

at stake

and they're spread across all the

countries in the world

then

they are in essence the first line of

defense for bitcoin

right you can call them different things

you can think of them as i refer them as

a motor of sovereignty

they're running the motor that keeps the

sovereign network fresh and they're

providing the transactions and the

security

but you can also look at them as the uh

at the round houses on the wall right

there

they are the first thing you're going to

attack

right when you decide you want to attack

bitcoin you're going to attack a bitcoin

miner they're the first thing to get

attacked

since they have the most at risk

if you're a bitcoin miner in china right

what have you suffered

you know that

a lot

they have the most to lose

and so the bitcoin miner in switzerland

is going to be spending a lot of time

you know thinking about whether there's

a political attack coming from

switzerland on bitcoin right

they will be the early warning system

the canaries in the coal mine if you

will

and so those those five layers

those are they're implied by the

proof-of-work algorithm

and we get energy technology politics we

get finance and we get

network

support and they're all sources of

inertia and anti-fragility

and they they all draw forms of capital

that are not bitcoin bitcoin is capital

but

dollar capital tech semiconductor

capital you know

political capital energy capital right

human capital

all of these forms of capital

are creating a genetic diversity

and a darwinian vitality

for the network

if i get rid of all that capital

if i just said well uh bitcoin's gonna

become a proof of stake network and

we're just gonna stake bitcoin to run

bitcoin

right you see what you've done is

created again a hermetically sealed

closed system

but that becomes an inbred system

and that means the biggest bitcoin

holder when they go insane

right the heart the security is not

going to get upgraded

right

we're not going to look for we're not

going to continue to distribute the

network we're not going to upgrade the

technology anymore

we're not going to spend much time

complying with

the local political rules

you know when howard hughes was the

richest man in the world he ended up

retiring to the top floor of his hotel

and didn't come out of his room for

seven years

he went bat crazy

you know you can do that when you're the

richest man in the world when you don't

need anybody else yeah

you know but but you can't do that

you know when you have responsibilities

you have to get up every day and you

have to go and put on a suit or a tire

or at least conform with the local

morays right

and that keeps you from going off the

deep end or off the abyss so this this

this vortex

you're describing of you know energy

technology politics surrounding bitcoin

that it's kind of assembling for itself

it's centered on

the expenditure of energy that's what

makes it real that's what gives all

these actors skin in the game

and the proof of stake model would be

something that severs that bridge you

know we have this digital reality and

physical reality that's anchored by

energy expenditure but if you move the

proof of stake you've now you've severed

that bridge

and yeah

the uh it's creating i mean on the

network mining specifically there's kind

of this dynamic equilibrium right

between of the governance between miners

nodes and all these various stakeholders

and i guess the last point that i think

is really important when we saw

exhibited

uh in this the chinese mining exodus was

the network's very amorphous you know

like you try one jurisdiction tries to

stamp it down

and what happens a lot of these miners

get boxed up shipped elsewhere plugged

back in it's a swarm creature yes

it's a swarm creature yeah

and it's a swat but it's a swarm

creature that lives

in the physical world and in the

political world it is not a is not a

creature in in cyberspace or it's not a

disembodied astral projection

i mean

if you cut the cord if you don't need

energy you don't need the semiconductors

if you don't need political support if

you don't need external capital and if

you don't need to engineer a facility

you don't need a corporate structure

then uh you've created a virtual world

like second life right and now

right if i create a virtual world

and i design in a virtual money or

virtual token

and then i stake that virtual token to

secure a virtual network

so that people can trade you know

virtual goods and virtual things

you know i can create virtual security

but it's virtually certain

right that someone's going to create

another virtual world

right right

yeah

you know

and so you're creating the problem is

yeah you outsmarted yourself you created

something which was free and easy

which means that you know

the guy that uh the guy that copied

whatever to create aetherium well then

the guy copies ethereum to create

cardano and then someone copies corodano

to create the

unis

they make sushi swap and then they make

the next thing

because you can do it fast and easy

what you've done is you've created a

virtual casino or a virtual world and

virtual money

and

it's not that you can't create a

business around it like second life is a

business

right uh fortnite is a business right

you know online gambling is a business

you can create a virtual casino or a

virtual game or a virtual world

dungeons and dragons and you can live in

it you can buy your virtual vorpal blade

and you can use it to kill the virtual

dragon

but the problem is

you don't have a bridge

to the thermodynamic real world

right nor do you have a a political

bridge to the political world

and

and you have um

you have lost

the space space-time constants

that uh that give the property integrity

and durability

and that's probably it's a good segue

for me to go to layers six and seven

the sixth layer is the spatial layer and

the seventh layer is the temporal layer

so by spatial layer i mean

the proof of work bitcoin mining network

um

forces you to spread out throughout the

world because you're not going to find

120

terawatt hours of energy

in one building

and even if you did in one building

the heat engineering is such that you

can't stack the bitcoin miners up over

each other like that

so you have to spread out and the

natural competition means that well we

find a volcano here and a nuclear

reactor there and we find some stranded

gas here

it's an open system and it's it's

naturally diffusing and decentralizing

and um

and that's important if

if you have a proof proof-of-stake

network and i have 50

or 20 percent of all the money

right then i can just stake the entire

network in monaco

right

right there's what why would why would

you need to spread it to the four

corners of the earth

well the problem with staking the

network in monaco right is that maybe

monaco as a as a political attack or

maybe the building gets wiped out

you know what if i stake the entire

network on like 16 computers in the same

place right centralization

yeah you're centralizing it and

you're putting it

there there is no thermodynamic

incentive to decentralize it and there

is no requirement

but in in fact

with proof of work and and the

requirement of energy

it naturally is going to create an

incentive for someone to put this on a

waterfall in the middle of africa

and

that that distributes the security load

you don't want all the security to come

from manhattan

right

right if all the security comes to

manhattan that's proof of stake that's

centralized pretty soon you've got

central bank

you know pretty soon you know like three

people get together and decide your

destiny

everything just centralizes you really

want to have the security come from a

country that you can't get to because if

you can't get to it

your enemy can't get to it

and ideally it decentralizes so it's

even hard to just to distinguish where

it's coming from

so that that spatial um that spatial

layer

is forcibly decentralizing it and it's

not it's not just decentralizing it

geographically it's also decentralizing

it politically right

and and

that causes it to decentralize across

lots of institutions

lots of political jurisdictions

and lots of geographic places

and if you want to attack it there is no

one central place to attack right you

can't find the vector yeah right there's

no logical nexus and there's no physical

nexus right how do i find the top you

know 51 of the hash rates in 198

facilities around the world how do i

take control of all 50 you know all 198

of them overnight without it to be

noticing because that's crossing 100

borders yeah yeah it's neutralizing all

these central attack vectors

so that it's

i guess it's by virtue of its own

proliferation it's becoming more immune

to attack

from anyone

it becomes immune to a cyber attack it

becomes

immune to a physical attack and it

becomes immune to a political attack

yeah

and it even becomes somewhat immune to

um to a protocol attack where someone

tries to get people to change the

protocol right it's just much harder to

attack the durability the integrity of

the network because

it becomes so spatially

distributed yeah the proof of stake 10

people might actually stake 51 so now i

can actually identify the 10 people now

i know who to attack right

psychologically

physically

whatever yeah

i don't even know where to start with

something which is

spatially distributed

so the the seventh layer is temporal

distribution

and by that it just means that

the attack has to come over time

because it takes 12 to 24 months to

create a world-class

bitcoin mining center

it takes another 12 months maybe to

order all the equipment

so

how do i go about ordering seventh

generation equipment

secretly

or with malicious intent

and then i have to convince someone to

front me the money right so i have to

hood wink a billion billions of dollars

of investors then i have to buy billions

of dollars of equipment

then i have to wait 12 months

then i have to

get someone to engineer the center and i

have to get them to agree to do it

because they trust me they're not going

to do it if they think i'm going to

attack the network

then i have to get the politicians to

let me build it

could take three five years

then i have to get all the engineers

then i have to build it i have to bring

it online so that i can attack the

network

and i got to do all that

without a single person guessing that

i'm trying to do it if one person thinks

that i might have malicious intent they

leaked that on twitter and two million

people would know it in seven minutes

yeah

so

so that

that's incredible the space-time

uh functioning of bitcoin is important

you don't want it to move fast this is

why you know

if you if you read the block size wars a

lot of maneuvering back and forth but at

the end of the day

the immediate a priori observation is

they shouldn't have tried to change

anything it was a mistake to try to

change the block size it's a mistake to

change the frequency

why

because

when you create a crypto universe or a

crypto creature

the block size and the frequency of the

network are akin to the space-time

constants of the universe it's like

trying to change the gravitational

constant and the speed of light

is like you don't get to play god

except once

you can play god once

if satoshi had designed the network with

you know

1.2 megabyte blocks and eight minute

frequency it might have worked

and there are some parameters that

wouldn't have worked but once he started

it

and it started to spin then you don't

change it

because

because the um

the size of the the block size

is kind of like the packing density of

carbon atoms you know or carbon

molecules you know all right it's like

you don't

if you if you were to change the speed

of light or the gravitational constant

let's say you change gravity on the on

the surface of the earth

let's say i made it 3x

what it is right now

what happens to every creature

every bridge every building

every plant

every factory

what happens when i crank up the

gravitational constant by a factor of

three

they are failing strategies all of a

sudden

if you change gravity

heck crank it up by a factor of ten

what happens

every building

and everything built up till now

collapses

i.e all work

is negated not just work by mankind work

by animals

work by mother nature yes rivers

mountains collapse

you know bridges collapse companies

collapse

countries collapse

so you would negate all past work

you would uh

you would imperil or or um

or uh impair all structures

you would imp you would impair or or

destroy all machinery constructed any

machine that works would stop working

and you would throw the future to chaos

and it's pretty obvious you're playing

god right change the speed of light same

thing's going to happen right the

reynolds number determines the hull

speed of a ship

change the reynolds number change the

way that molecules move around you know

a hydro

you know foil

yeah nothing works

something sync

at best everything just gets destroyed

you know commerce collapses

so when you think about it like that you

come back to the crypto universe you

said okay you created a crypto

you set your space time parameters

now the future of mining is based on

that block size and that frequency

change the block size change the

forecast of the mining revenue change

the change the expectations of every

investor

change every business decision

invalidate all business decisions yeah

at some point right if you keep

the the foolishness of like doubling the

block size which is what the big

blockers wanted to do is if they had

doubled the block size over and over

again they would have driven transaction

fees to zero

when transactions fees go to zero the

revenue of the bitcoin mining business

is

dramatically changed now there's no

future revenue model now you have miners

lobbying to change the block rewards you

would basically

bankrupt the mining business screw it

all up and then you would have you know

you've got no security network because i

can't afford to actually secure the

network so

so what they were imagining a world

where everything had to be on the base

layer and they're monkeying with the

base layer and instead what they should

have seen is that the world is in layers

the the key is

the base layer of bitcoin is like the

granite

underlying manhattan

you never needed it to be lighter if

somebody said i have an idea let's turn

the granite in manhattan into cotton

candy it'll taste better

it's like are you an idiot

if you turn all of manhattan into cotton

candy all the buildings are going to

sink we're all going to die

in a cotton candy swamp

it's like you know it's so silly like

we're laughing

but the point is but the granite's heavy

and it's hard for me to move and it's

slow and the transaction fees on moving

granite around are high

yes

exactly you're not supposed to move the

granite yeah you're supposed to build on

top of the granite

and the same is true with the base layer

you're not supposed to move the base

layer the point of the base layer is to

be here a thousand years from now right

right yeah you can wave your arm and

convert the granite into sand or into

you know into mud

and you can move it

you know you can shovel it out of the

way with your little toy shovel from the

seashore when you were a kid

right but but the point is you can't

build a city that's going to last a

thousand years on mud and on sand

and if you had if you have a

understanding of the universe

the universe is layers and layers

and the consequences of the speed of

sound

is everything that flies through the air

and the consequence of the speed of

light

is everything in the universe and the

consequence of the gravitational

constant is how the water flows and how

the mountains move

and once you understand those things you

can build everything everything that

humanity's done in the history of the

human race is predicated upon those

space-time constants being what they

were and when you decide to routinely

change them you're playing god

and when you play god

right you you pretty much destroy

everything that came before and throw

into chaos everything that comes

afterwards

you know after leveling every building

and wrecking leaving a trail of wreckage

you know in

in the present day

yeah like an earthquake except it's

it's worse than an earthquake

it's like a continual rolling

you know randomized series of different

earthquakes every second

yeah and that's why you don't want to

screw with that

right yeah for

the way i'm looking at this is if we go

back to that

you know life and bitcoin being the

survival strategy propagating forward

those strategies

optimize

for the environmental invariance

so you know life is optimizing kind of

to overcome gravity in a way and if you

change one of these invariants all of a

sudden you invalidate all the survival

strategies like everything that's all

the adaptation

all the fitness modification that's ever

been done it's just worthless all of a

sudden double gravity kill all the birds

yeah like that yeah kill all the birds

right like

it's like it's a very why would just

double the block size or cut it in half

yeah because like everything will die

why don't we cut the oxygen you know the

oxygen content in half yes happens and

then that very

precedent

destroys bitcoin right has there been a

successful change and i've heard it put

this way is that

you know bitcoin cannot be reproduced

because ear reproducibility was the

invention it's like to create something

that no one can change

so if you somehow

yeah if you somehow change it then all

of a sudden

you've destroyed that you know

invariants that it was offering

um

and this is incredible i've never

thought about how these layers actually

preserve it in such a way and the

temporal layer is interesting too

because it's

if you try to attack it it's like

there's no way to do it without alerting

network participants so there's just

this it's kind of like a lag or a buffer

and a complex system that stabilizes it

like you try to create a change

people adapt

that's the sound

that's the speed of sound

like for example you're like wouldn't it

be great if sound move faster or slower

well

a shock wave is when you attack the air

faster than it moves out of the way

right so well do we need a speed of

sound

yeah you need a speed of sound what if

we made the speed of sound equal to

speed of light

not a good idea

you know like

not a good idea if you want the universe

to work

what if we got rid of friction

like transaction fees are too high let's

take them to zero well that's the same

as saying let's just get rid of friction

and let's get rid of gravity well

getting rid of gravity and getting rid

of friction is a problem because like

pretty much every everything we created

like works with it

right like try how about your tires

without friction

like how well is your car going to drive

uh

you know so like they're not bad things

the thing that was you know in the

defense of the big blockers the

lightning network was not as manifestly

clear today but if all you have to do is

look at a lightning wallet a lightning

transaction

and look at um a layer two and a layer

three transaction look at how square

cache app works

look at how moon works

i can send a thousand sats in a split

second for one sat

once you see that you realize layer two

platforms layer three applications are

gonna move bitcoin at the speed of light

in an almost friction free way

and what did you really want from

bitcoin you wanted it to not break

yeah

right you never it was foolish to it's

foolish to risk

the immortality

[Music]

of bitcoin in order to go from one

megabyte to two megabyte blocks right

it's foolish how about

you could have had something that would

be immortal and you could build a

civilization that would last for 10 000

years and you could just do it using

layer two and layer three apps

but instead we're risking putting out

the fire of civilization to try to

change the space-time coefficients of of

the one crypto network

which successfully took root and

decentralized right yeah and that

emulates nature properly to your point

where nature evolves in layers so we

need an unshakable foundation to support

higher layers

so let's talk a little bit about

proof-of-stake and the like because

that's the elephant in the room here

look proof of work is an open

competitive

natural system

it emulates darwinian competition

and it's open

proof of stake is a closed controlled

system

and so the problem with a closed control

is it's not darwinian

and uh and there's no genetic diversity

it becomes inbred

so if you look at let's take a shoreline

a living shoreline if you're trying to

actually uh maintain such a thing the

way they engineer it is

you would create 200 foot long uh

revitments and then you would put a

break in it for the sea water to come in

and then you create another revit meant

to to protect the shore from the surf

but you always have to have a break for

sea water to come in

if you don't leave that channel for sea

water to come in then the water behind

the revetment becomes putrid

right

it's pretty you know you don't want you

know you ever seen a putrid standing

body of water without any circulation

you know it breeds bacteria it becomes

infested it becomes dangerous it's not

healthy

right um

and why it's closed

you know it's closed system

all you know all cities all

civilizations why do you build a city on

a river because you need something to

carry the waste away

right what happens if you recirculate

your waste in your own

how long can you you know recirculate

the waste in your spacesuit

how long can you recirculate the water

in the waste in your apartment you know

well

proof of stake is recirculating itself

and and the problem there is unless you

have perfect components and you never

and you have

you know perfect conditions

at some point either

the toxicity of the closed environment

destroys the ecosystem

or it becomes so fragile

because of the lack of darwinian

competition and a lack of ecological

genetic diversity that um

eventually it dies

it's like

you know it's like a

it's like a creature endlessly cloning

itself right

after you endlessly clone yourself

you're subject to genetic mutations and

defects you you know that's why you know

every organic creature has sex right you

you actually want to keep mixing the dna

right in order to avoid the

mutated defects

right and you can't cleanse yourself you

can't fix

the species this is like a closed system

like a photocopy of a photocopy of a

photocopy eventually it gets very

blurry right

yeah

and and i guess coming back to the other

elephant in the room here

bitcoin is a successful proof-of-work

network that has created our first

digital money

our first digital property

bitcoin has done that we can see that

there are no successful examples

of a proof-of-stake

network succeeding as digital property

that's the elephant in the room

there are no successful proof-of-stake

networks

right we've never gotten

what would be required to be successful

well here's a simple one

uh

if the united states government

designated a proof-of-stake

network

as property

and not a security

it's never happened

in fact you know the head of the sec

just went on television and said if

there's an ico and there's a

shared enterprise with intent to profit

then it's a security yeah

so as far as i can see every

proof-of-stake network that's been

launched

looks to be by legal definition of

security not property

and even ethereum

isn't a proof-of-stake network so

there's a debate about about whether it

is property or not and that'll

eventually be resolved

right but

but um

there's absolutely no question that

at this point the only successful

digital property that's ever been

created in the history of the world

was created on a proof-of-work network

right

there's nothing else everything else is

just like a garage science experiment

right a venture a venture experiment and

on the surface

they all appear to be securities

right i mean not none of them have

successfully decentralized or been

embraced

as property

and it's not clear whether they can

successfully decentralize

i mean theoretically

theoretically new things are possible

but practically speaking

we have one example

of crypto property or crypto money

that is bitcoin and everything else is

is a speculation let me ask you the

could we say

it seems to me like central banks in a

way

are kind of a proof-of-stake network

where essentially the more

gold they have or reserves they're

staking

the more interest and inflation revenue

they can generate effectively so

could we say that then a proof of stake

network

could only really exist with because