Mining, a not so sexy business
This week, I chatted with Joe Lallouz, a serial entrepreneur and angel investor in New York City.
The first time Joe had ever heard about bitcoin is back in 2011. Like many others, at the time he didn’t realize bitcoin would be the next big thing. He thought bitcoin was “something different, and something weird”. What he also didn’t expect was that “this weird thing” would steer his life in a brand-new direction.
In 2012, he co-founded Grand St., an online marketplace for creative technology. This marketplace ended up being one of the first commerce platforms to integrate bitcoin payment. Even though the usage was very low, it paved the way for the beginning of his journey getting into crypto.
Driven by his technical interest in the crypto space, this year, Joe founded a mining company -- Bison Trails Computing -- aimed at building the next generation blockchain infrastructure. We had a very fascinating conversation about the future of this “not-so-sexy business” --Mining.
Bianca: Mining is the oldest section in this space, and it was formed from day one when bitcoin was first conceived. Why do you think mining has been such a quiet topic?
Lallouz: Honestly, I think mining isn't a very sexy business. It's very traditional, and for a lot of people it can be very boring. It's not very exciting. It doesn't have that huge dream appeal that some of these new networks have and I think that's why it was being overlooked.
Bianca: How did you get into mining?
Lallouz: Because our story started in hardware, when I finally left Etsy with my co-founder and we decided that we were going to start a new business. We started looking at what were the areas that we had a lot of interest and passion around. It was 2017.
It's the beginning of last year, so it's almost two years ago. We sat down and ask ourselves, ok if we could choose anywhere to go where would we go. We actually started the first thing we did was we started by traveling a little bit and we travelled we mostly travelled around Asia.
We were mostly in Southeast Asia and in China and Japan and found that no more.
And in Korea and in Korea we got a lot of exposure to cryptos, and we realized oh man this is something real. You know this isn't just what we thought was like a fun little side project back home this is something real.
And so we started getting more and more involved investing in more projects meeting more founders. And that's when we said let's look at some of the areas that no one is paying attention to. In the blockchain and crypto space and one of those areas that kept coming out and sticking out with us was in particular mining.
Bianca: What was your first step you took to get into mining?
Lallouz: The first first first step and this is kind of like you know founder 101 -really ask yourself do you want to do it. So once we said you know this is interesting enough that we want to do it which we built a mine.
So we actually spent a lot of time talking to mining equipment manufacturers talking to power providers all over the country. We started the process of negotiating on property to build up a mining data center and trying to find where the best place would be. And doing a whole bunch of analysis around like the weather and environment around it because you really need sort of like the best pieces to be able to be successful in the mining space.
So we we picked the pacific northwest of the United States. So We decided that we wanted to be In the United States for a few different reasons. We also were able to find a power provider that was able to give us power at very very good rates. The other thing that was really important to us was we wanted to make sure we were using renewable energy.
So we were only looking at locations that could support hydropower or wind power. We ended up finding a space over there and negotiating power contracts and then my co-founder and I designed and built out a data center you know first through like architectural drawings then we hired some engineers to kind of build out what we wanted to do. So that was the first step to getting to mining.
These days it's still profitable. I think the key pieces for us was finding the right power provider. Yeah that was able to provide us power at a reasonable price quite low. The second thing is that we actually took a software approach to operationalizing the mine. Because we're software founders we were able to write software to to make our operation more lean. We don't have to hire as many people. We were able to solve problems much faster all using software. And so that actually gave us a boost in profitability as well.
Bianca: How did you discover this (2nd generation of mining) new direction, and why do you think there are bigger opportunities for it in the future.
Lallouz: My co-founder and I built a proof of work (PoW) mining data center, and we ran a company that engaged in proof of work mining. In that process, what it did was to really deepen our interest in the infrastructure piece of the blockchain space. That process pushed us further and further into understanding and believing in why infrastructure is so important in the space.
Then we started looking at different types of networks. Bitcoin is a more mature blockchain network, and it's been around for more than 10 years. It's still very young compared to other technologies. Then we started looking at what we would call immature blockchain networks and new networks that were coming out.
We asked ourselves what are they improving, what are they changing. One of the biggest things that stuck out for us was this idea of creating value in a network that wasn't related to just deploying capital. That was a big piece.
To put it as simply as possible, we started looking at networks where the hardware mattered less, and where the software mattered a lot.
Bianca: Anything other than PoW?
Lallouz: Anything but PoW except...well that's right. It's anything but PoW. But it really mostly focused on networks where software can provide value. There are some networks that are not PoW but you still maybe require hard drives or are focused on storage and they can be very expensive to operate in as well. And I don't wanna say we've stayed away from them. But we have put more emphasis or more focus on networks where hardware is the commodity and we can build really really great software to help the networks themselves.
Bianca: Another question is in bitcoin or PoW world, people are critical of the fact that it‘s getting more centralized. Do you think that with the next generation of mining, a company such as yours will become centralized as well, especially in that a lot of clients may put the token under your node.
Lallouz: Our view here is to not build a centralized entity that everybody sticks to. We're not trying to further centralize the networks. What we would like to do is build the technology and the infrastructure to be able to run and operate nodes, mining nodes on all these different new networks as easily and as securely as possible. That's our goal.
One of the things that's most exciting for us in the crypto and blockchain space is being able to define and design new business models. And I think that's where we're going. I expect to see a tremendous amount of innovation over the next 6 to 12 months. So, what you're saying is, (If) there's money involved, will that stop you? And I think what's interesting is that we can design new business models for this ecosystem that support both being successful as a company and as an entrepreneur by making money and driving revenues but also by supporting the mission of these decentralized networks. I don't believe that you need to control the network to make money. I actually think that you cannot control the network, but rather encourage others to participate and control the networks while keeping it decentralized and still make money, and that's where we see it going.
Bianca: In the PoW world there's a mining pool so people can participate in a pool. Will there be something similar on your node because people are participating as well, like a new type of mining pool?
Lallouz: One of the things that I think is a big misconception about the PoW world of approval work world is that it's truly decentralized. That is because when you actually look at the major mining pools, there's only a handful that exists, the major ones. There's been five to seven major ones that control the majority of the network. So, when people say, oh, well proof of work, it's way more decentralized, it's not actually true because a lot of these pools are actually smaller than some of these networks like, for instance, Cosmos which will have 100 validators or 100 nodes on its network at any given time. You could argue that that is actually more decentralized than proven work is. So, I think that, at least in this stage of the ecosystem, some amount of centralization is okay. Obviously, you don't want to end up in a scenario where any party can make decisions on behalf of everybody else and you don't want to allow large organizations or Internet service providers or governments to control a network. The whole idea here is about democratizing the ecosystem.
Bianca：I'm just thinking about a scenario, for example, like on one network, Livepeer, you'll have an upgrade debate. During these upgrade debates, are you going to vote for your clients? If you are going to help your clients to vote, that means you will have a lot say on that network, how will this kind of scenario play out?
Lallouz: In an ideal world we want to make it easier for individuals to vote, so instead of voting on your behalf we'd like to make it easier for you to vote and we're still trying to figure out all of the different pieces of how that comes to fruition or comes to life whee you know piloting a few different programs right now with some of some investors some hedge funds some venture investors that are you know pretty early investors in these networks and I'm not signaling out life here in particular but that's a really great example of a way to participate in a network through governance that we think is important and we don't want to do that on your behalf. And we think that that puts us in a position where we have way too much power and we think that's a bad thing for the networks. So what we'd like to do is make it easy.
Bianca: As you mentioned it's less capital for the hardware, so what will that look like？
Lallouz: Our thesis with this company in terms of building next generation long chains is to fill the gap in between the protocol layer and application layer. There's a whole bunch of projects and blockchain that are being built to try to solve very specific problems. Multisig wallets, video transcoding or the world's largest distributed computer. But to be able to build anything on top of those networks, you need to rebuild a large piece of the infrastructure that currently exists in today's Internet world. If you were to imagine the email protocol or the web protocol such as HTTP, or if you were to try to build Gmail right now, you would have to build a ton of pieces in the beginning, the mail protocol and the actual application. What we're trying to do is build all of those pieces in between the protocol itself and people that want to build on top of it.
Bianca：If we use less hardware, does that mean companies like Bitmain will have less market size in the future?
Lallouz: Well first I would never underestimate a company like Bitmain because they've done some incredible work so far. So to say that they would have less of an impact on the future is maybe a bit too presumptuous. You know in my humble opinion I think that you'll see an expansion from a bunch of these different companies. I think that the best companies will start to look at infrastructure holistically instead of just how do we build an ASIC miner but how do we help participants in these different networks. And that's exciting for us because we're a small company. We're a software company. We're not trying to be a hardware company. And there are actually very different businesses and different focuses. So for us it's like well we have a you know a leg up in that direction and we're really excited.
Bianca：Are there other competitors coming and is the barrier to entry quite low?
Lallouz: There's two there's there's two key pieces I think that make it hard to enter here. One is we've been doing it for a while and so there's a certain amount of experience and entrenchment there. And Then two is it actually takes a certain amount of expertise. And so we have a lot of expertise in building large scale computing systems and infrastructure systems and building previous tech startups. I think that there definitely are a few competitors. I hope we know them all. I don't know if we know them all. There might be some we don't know. But we are not lonely. There aren't too many people that are taking the same approach as us. So our approach is to truly take a deep technical approach to this solving this problem and focused on the technical elements of these networks because we think that that's the path forward over the next 10 years.