Marshal Long - CEO Final Hash

Final Hash CEO Marshall Long discusses Bitcoin mining in China.

PODCAST INTERVIEW TRANSCRIPTION

 

Interview with Marshal Long on How to Mine Bitcoins

  Trace Mayer:  Okay.  Welcome back to the podcast.  We have a very important guest with us today.  We have Marshall Long, CTO of FinalHash, one of the leading [bitcoin mining](/en/mining-guide/) experts in the world on how to mine bitcoins.  Welcome to the podcast. Marshall.

Marshall Long:  Thanks, Trace.  Thanks for having me on.

Trace Mayer:  Can you give us a little bit of your background?  How do you get into bitcoin and why bitcoin mining specifically? How to mine bitcoins?

Marshall Long:  Yes.  So, kind of got in around 2009 late and it's interesting, one of my friends was just like hey, man you got to check out this crazy internet money that you can make with your computer.  So, I guess that kind of what my wife would describe as started me down the dark path of loud and hot housing.  So, just the whole mining concept -- this was just, you know, very superficial in 2009.  I didn't really see the long game.  Unlike yourself, I mean, I think from the get-go you definitely saw the mass appeal that it's gaining today.  I was more of hey, this is kind of nerdy and cool. I'm going to check it out.

Trace Mayer:  Yeah.  And I mean, I remember back in those days, you know, mining even with my laptop.

Marshall Long:  Yeah.

Trace Mayer:  And I mean, back in those days we'd actually earn like a fifty bitcoin block reward.

Marshall Long:  Oh, yeah.  It's just like a dollar.

How to Mine Bitcoins

Trace Mayer:  Yeah.  Less than a dollar in some cases.  And I mean, you'd earn like multiples of these rewards like every day with -- mining with a laptop.  What is bitcoin mining?  Like you know some of our audience might not even really understand what we're doing.

Marshall Long:  Yeah, sure.  So, one of the big claim to fames I'll say of bitcoin is this whole security model, how the big banks and the big players can't mess with it.  Now one of the reasons that's true is because of this mining aspect.  So really what you're doing when you're mining bitcoins is you're securing a network.  What I mean by that is when somebody sends some bitcoins it's got to be confirmed by the network and what that actually means is some miners have to verify that you actually sent the coins to who you intended them to go to.  Through this kind of process of confirming that, you know, if Trace sends me bitcoins some other miner somewhere has to verify that actually Trace didn't send me the same bitcoins that he sent somebody else.  So that's kind of why mining is important because it's actually the foundation of what makes bitcoin so secure.

Trace Mayer:  Yes.  So, I like to use the term triple entry bookkeeping.

Marshall Long:  Sure.

Trace Mayer:  When bitcoins are going from address A to address B you got a debit and a credit and a corresponding debit and credit and this verification, this confirmation that you're talking about, that's the triple entry.  That's saying that that transaction actually did happen and that confirmation is being done by this distributed decentralized protocol or network of computers.

Marshall Long:  That's right.

Trace Mayer:  Is that accurate?

Marshall Long:  Yeah.

Trace Mayer:  And so how does the block -- because when you craft a transaction you then submit it to the network and a miner can choose to include it in a block.

Marshall Long:  Yes.  So, this is kind of an interesting time for my mining right now because when you actually send a transaction out and broadcast it to the network a miner has to pick it up in a block.  So, if he's working on a block he can say, okay, I want to include your transaction in my block.  What that means is your transaction will go into these kind of every ten-minute block finding game.  So, everybody thinks miners are just creating bitcoins, but in reality what they're actually doing is picking up transactions and pushing them into this next round of blocks and this aka this next round of bitcoins that they're creating.  So that's really what they're doing is they're including everybody sending out transactions over the course of ten minutes or so give or take and they're putting them into a transaction, which means putting them into a block and for that reward they're getting right now twenty five bitcoins.

Trace Mayer:  Why would they want to include transactions in a block?  That sounds like extra work.

Marshall Long:  In reality it is.  So, as you send bitcoins you get the option of okay, I want to include a transaction fee which will incentivize miners to pick up this transaction.  Because if you send it with zero fees, a lot of minors right now on a large scale they're actually saying to the network, hey, I'm not going to pick up that transaction.  Now not every miner is doing that.   A lot of the small guys don't do that.  But all the big guys are not including transactions that have a zero percent fee because you're not incentivized to do so which means your transaction just may take longer than somebody else that's going to put up a fee to have miners include their transaction in the next blocks.

What is block chain?

Trace Mayer:  So, when we're adding these blocks we add them to the block chain?  Maybe you can describe a little bit about what this block chain is,

Marshall Long:  All right.  So, this block chain, it's a very descriptive term.  You have all these blocks being confirmed and the actual chain terminology is this "ledger".  Where when I include a transaction, it's going to be published into what is called the block chain which effectively is a large tamper-proof, we call it, order book or a record of some kind.

Trace Mayer:  Ledger.

Marshall Long:  Ledger is a great descriptor.  You know, the guy's at Ledger Wallet, they picked a very decent name for their wallet.  So, it's effectively a tamper-proof record book or ledger of what's happened since bitcoin began.

Trace Mayer:  And so every single transaction that makes it into this block chain it becomes in effect an immutable fact.

Marshall Long:  That's right.

Trace Mayer:  That is cryptographically provable.

Marshall Long:  That's right.

Trace Mayer:  Because when we want to get our transaction included into a block we actually have to solve a math problem, right.  Maybe you can describe how that works.

Marshall Long:  Right.  So, when you're actually going and you're doing this kind of mining process what you're actually doing is taking a whole bunch of guesses at what this kind of magic equation number is.

Trace Mayer:  That solves the equation.

Marshall Long:  That's right.  That solve the equations so that you can --.

Trace Mayer:  Nonce.

Marshall Long:  Right.  So, there's a kind of golden nonce is where you're going to hit the block. You're going to include everybody's transactions and you're going to be rewarded.  And that's where the power is because you can prove a lot of things with this passing through these nonces and taking a guess.  I equate it really to just having a shotgun and you're just kind of spraying around and trying to guess which number is the right one for you to be able to pick up this next round of blocks.

Trace Mayer:  When a miner solves a block, how do they determine where that block reward goes?

Marshall Long:  So, really it's an arms race.  So, whoever's got one of two things and if you've got both you're kind of killing it.  So, there's two factors in who is going to be rewarded.  You can either have a large amount of hashing power where you've just got a lot of computational power.  It's kind of blown away through these blocks and you can pick up blocks obviously it's linear.  So, if you've got more power you're going to find more blocks.

However, there's also this kind of aspect of luck.  It's interesting I -- we spun up a new instance of I don't know maybe a hundred machines which by today's standards is not super large and we found a block within five minutes.  Now the estimated time for us to find a block was four days with the small amount of machines, but this kind of concept of luck is one of the machines just took a really good guess right at the beginning.  And it hit.  So, this kind of concept of luck makes it also available for, you know, small guys to be able to hit blocks too.

Over 50% of the mining power is in China

Trace Mayer:  How much of the mining power of bitcoin is in China? How to mine bitcoins in China?

Marshall Long:  Through my personal contacts and my clients and some of the stuff we do also we're probably looking at over 50%.

Trace Mayer:  What do you mean like your clients and what you do, I mean, what exactly you do over there in China?

Marshall Long:  Sure.  So, you know, Final Hash, we're pretty diverse.  But in China exclusively what we're doing is two things.  We're helping tape out new chips because miners are feeling the crunch right now for power efficiency on their mining machines and these kind of things.  We do a lot of chip tape outs.  We do a lot of deployments.  We help consultant make things automated for them.  Because, I mean, the Chinese business model is let's throw something up and then just hire a bunch of guys to run through the aisles and turn machines off.  You know, a lot of folks are feeling the financial squeeze and they're looking to save money on a bunch of different areas.

Since the difficulty is really high.  So, we'll come in.  We'll implement some software so they don't have to have 20 guys run up and down the aisles of the data center.  We also just recently signed some contracts to move a rather large exchange to China.  That's an exchange called Cryptsy.  So, they're expanding to China to kind of serve this under-served population that's, you know, a billion and a half people that are hungry for something.  So, in China I would say it's a lot of hardware stuff, a lot of financial stuff and a lot of folks have problems getting into China just because the economies of scale in China are very different than they are virtually anywhere else so.

Trace Mayer:  Now an interesting aspect you hit on with like this probability and this luck of finding a nonce and in -- with the law of large numbers, we can pretty accurately predict if you have so much hashing power then you'll find so many blocks.  The expenses will be so much with having to acquire the chips and the machines and the electricity, but it severs the audit trail.  You know, we have the expenses but then we create these brand new bitcoins in the network that we can do anything with.  Is that advantageous to some of your clients, to the Chinese?

Marshall Long:  It's interesting.  So when you're doing these new kind of hardware tape outs you have two options.  You can either mine with it yourself or you can sell it to the general public.  Now, especially for the US and most of the Western world there's kind of a stigma on Chinese products just in general.  Which I'm not going to say is unfounded, but really if you want some good hardware you got to get it from China at a decent price.  Because right now the price is depressed a little bit and it's hard to turn money doing mining.

So if they're going to sell to the public they generally try to partner with some people with good reputation that can help to move hardware using their name.  Because if you just have a new Chinese company spin up nobody's going to trust them.  Just because of the stigma of doing business with Chinese due to some decade old, you know, what have you.

Now if you're going to mine with it, it's quite risky also.  Because you've got, you know, maybe a two to five million dollar tape out expense that you're trying to cover.  So, if you don't have virtually free electricity and you don't have adequate cooling, really what's your choice.  You got to sell them, but if you can't sell them you got to mine with them.  So, it's kind of a catch-22.  Because if you mine with them you're probably going to lose money and if you don't get very inexpensive electricity and if you try to sell them you're probably not going to be able to because mining is so competitive right now because of the price deflation.

Trace Mayer:  Well, when you talk about like you're going to lose money.  We have a lot of mining that goes on in Argentina and China.  You know these are countries that have controls on the flow of capital.  Does that go into that economic calculation that individuals or businesses are taking into account when deciding whether or not to invest in these mining farms?

Marshall Long:  Yeah.  And, you know, it's interesting.  China in particular, there's so much capital floating around China from guys who made it big, you know, in the 70's from -- China kind of open its arms to the rest of the world that a lot of our big investor clientele see this is kind of the new Renaissance.  Kind of when Mao open the doors and the guys after Mao open the doors up.  They kind of see this as their second window of hitting it big again.  So you got guys that are willing to roll the dice and sit on the coins.  We've got one client that has held Litecoin ever since the beginning.  So, not just bitcoin.

They're one of the first script coins tape outs to be successful.  They have not sold a single Litecoin and that's because they're just speculating on the price because they can afford to do so.  So that's one thing and as far as the economic and totalitarian system in China, China is actively going through a cultural renaissance right now.  The premier of China Xi Jinping, that's kind of his mantra right now is let's get all this corruption out of everything and let's do it another cultural renaissance.  And it's an interesting time in China because you can kind of feel the undertone of things starting to change and economic prosperity is one of those things and bitcoin is a very readily available solution to that problem.

Trace Mayer:  To that problem of state control over the money and so, you're talking about the liberalization of this economy, the freeing up of people to engage in trade and economic calculation, to get away from the price controls and one of those primary price controls is going to be on the renminbi on the yuan itself.  So, how is that impacting this whole bitcoin, altcoin market?

Marshall Long:  It's interesting and this is a big primary pushing mechanism for Cryptsy going to China actually is.  This is the first time in history that it's truly easy and openly accessible for anybody to do truly global commerce.  So, if I wanted to order something from a US company and I'm in China, outside of customs, regulations and these kinds of things, you can physically order something real-time, instantaneously without having to go through any kind of regulatory roadblocks.

And from a country that's had a full history of full repression economically, financially totalitarianism is a great place to kind of see bitcoin take off.  And that coupled with Xi Jinping being -- I'm not going to say an extremely laxed premier, but he's definitely more open to some new opportunities makes it -- outside of China just kind of chopping the internet from the outside.

It's a really interesting case study to see what happens when you suddenly give a totalitarian system and repressed population the open access to really interact with the whole world.

Trace Mayer:  Well, I mean, we saw, you know, after Mao and kind of the liberalization of the economy in that first wind 300 plus million people lifted out of poverty.

Marshall Long:  That's right

Trace Mayer:  And so, with the rise of cryptocurrencies and liberalization further of their economy, I mean, we find that wealth generation follows increased freedom.  And that economic stagnation follows repression and regulation and things of that nature.  That's why the Western economies are doing so poorly and there's no growth in the US and the EU, for example.  They have just so overly regulated and burdened their entrepreneurs and wealth creators.  So you're seeing the opposite of that trend in China.

Marshall Long:  Yeah.  And it's -- when I first went to China I didn't really see it.  So I kind of got to know some of my partners and kind of interfaced with some of the local population there that were using bitcoin.  And you start to see this kind of play where big investors are willing to roll the dice on two things.  Yeah, maybe I'll make a lot of money, maybe not.

But these are guys with billions of renminbi that are willing to roll the dice on two things.  Yeah, maybe I'll make some money if bitcoin goes to the moon, but the bigger potential is let's actually try to make something for the public.  I mean, you have big philanthropic guys in the US.  You have Bill Gates, Warren Buffet those kind of guys that do the same thing but for new money it's a very -- in my opinion a big paradigm shift.  Because most new money guys are worried about generating more wealth.  In this case, generating more wealth is kind of the caveat of, you know, helping their country kind of get their act together.

Trace Mayer:  And we're talking about getting their act together so that they can be even more competitive with their exports, create even more jobs.  Are we seeing Chinese exporters using bitcoin is a currency instead of dollars or renminbi?

Marshall Long:  So, right now you're not on a large scale because China has not officially come out and said, yes, we approve or no, we do not approve.  Because the reality is still to this day, large amounts of money don't move in China without the government giving you a nod and saying okay, that's fine.  You know, it's interesting Jack Ma, his whole business model around Alibaba is very different than pretty much anybody else which is why I think he's had huge success and he's never taken a single penny from the government.  And he has never listened to a single thing that government said.  He pays his taxes and they leave him alone.  The question is now, well, how can that be?  It's because him unlike all his other colleagues, he didn't take any money from the government, he didn't give any money to the government.  He's one of the originators of laissez faire in China, I think.

Trace Mayer:  Wow.  And, I mean we're talking.  What if they just IPO?

Marshall Long:  Yeah.  They IPO'ed Alibaba for like the starting price was $60 or something ridiculous.

Trace Mayer:  Which -- what type of market cap or like?

Marshall Long:  Huge.

Trace Mayer:  I mean, is it huge?  Hundred billion or something like that.

Marshall Long:  Hundred and seventy billion or some crazy like that.

Trace Mayer:  Yeah.  Some of them just absolutely crazy.  Do you think we're going to continue seeing more publicly traded companies coming out of China?  Like more wealth creation.

Marshall Long:  I do.  Because that's kind of Jack Ma's -- that's his mantra.  He wants to -- his whole thing with Alibaba and especially Alipay, he likes to say we're not really the e-bay of China.  We are truly the world merchant.  They have over a billion different products on Alibaba.  That number -- you can't even comprehend that.  They make Amazon look small.

Trace Mayer:  Yeah.  Wow.

Marshall Long:  And the way they're so successful is they do this kind of trusting mechanism where Alipay's effectively an escrow service.  Jack Ma effectively employs I don't know something like 10 million merchants or something just in mainland alone.

Trace Mayer:  Wow.  So are we looking at like, what affect could cryptocurrencies have for these Chinese businesses that want to establish trust, deal with consumers etc?  I mean, we've got trustless payment, multi sig, things that we can build right into the currency like how is this going to affect ecommerce?

Marshall Long:  So in my opinion I think bitcoin maybe not even bitcoin, some other currency maybe, that's cryptographically provable and easy to move around, you're going to start seeing this rejuvenation again of lifting people out of poverty because now you empower small-time merchants, you know, maybe they don't even have access to an ecommerce store.  Which is why Alibaba is so successful.  Because they make it extremely simple and effective for people to be able to sell their goods and products that they have either made themselves or have access to.  Effectively giving you an easy way to run your own business.

I mean, look at Uber.  Uber's business model's incredible.  I take Uber in a lot of different places around the US and I talk to every single one of them and I ask them what do you like about Uber?  And their answer every single time is, I'm running my own business effectively.  I don't have to buy a cab.  I can use the transport I've got right now and I can generate revenue on my own and that's a really powerful thing.

Trace Mayer:  Yeah.  The meshnet or the sharing economy.

Marshall Long:  That's right.

Trace Mayer:  When it comes to bitcoin, you know, what are you most optimistic about?

Marshall Long:  I would say what I'm most optimistic about is the new applications that are being built for bitcoin.  Right now we've got a problem in bitcoin.  The benefit of bitcoin is also the problem.  It's very easy to move and kind of transition currencies and these kind of things.  But it's also for the general public.  Very -- I guess, aqueous would be a good word there where a lot of people just don't understand it but there's a lot of applications that are making it exceedingly simple for people to move money.  And there are some applications now that utilize bitcoin on the backend.

So, we've got a money transmission conference going on in Philippines at the end of the summer where, you know, Coins.ph they do it really well.  You send money, but the mechanism is bitcoin.  The actual transaction is not bitcoin.  So, if I put dollars into a kiosk, they're going to use bitcoins to send it to the Philippines and then you're going to get pesos on the other side.

Trace Mayer:  In an hour, with a guy delivering it on a motorbike.

Marshall Long:  That's right.  And --.

Trace Mayer:  Which is just unbelievable.

Marshall Long:  That's insane.

Trace Mayer:  And they have what like 25% of their employees are all offshore freelancers.

Marshall Long:  That's right.  And it's interesting, RSBC partnered with us for this conference and we asked them for some matrices, you know, what are you guys seeing as far as incoming capita and they said over 90% of effectively what we can call GDP is from outside the country.

Trace Mayer:  We've had a very important interview with Marshall Long CTO of FinalHash.  One of the leading mining experts in the world.  Thanks for being with us, Marshall.

Marshall Long:  Yeah, man.  Trace I really appreciate it.  Hopefully you guys found how to mine bitcoins educational.

Trace Mayer:  I like to give a shout out to Aaron Baldy, one of our fans who contacted us via Facebook.com/bitcoinknowledge and made this really cool music for us.  Enjoy.

[Song by Aaron Baldy]