Bitcoin is the 'Holy Grail' of accounting, says Core Scientific founder

I'm doing well. Thanks for having me, Frank. Core Scientific, either one's great. It's been a pleasure listening to you in the past and a pleasure to be here, but this time you get to see the face in addition to the voice, which is quite the treat.

Well, you don't want to mix the water and the Bitcoin miner, so you don't want to put it right next to it. But you could potentially exhaust into it. That would seem like a viable way to heat some amount of water. It would depend how many miners you had and what the energy footprint of your house was. You would probably break a lot of things in trying to heat the pool, so I don't think I would recommend that. But it is an interesting idea.

It started in a commercial-style building that we were part owners of that had some additional energy. We didn't need that much because I think I bought 30 or 40 GPUs at the time. The genesis was, I was an accountant, and then I was a lawyer for a very short period of time. I wasn't good at either one as an employee. I ended up starting my own company, a boutique investment banking company, which I somewhat still have. We specialize in distressed projects. I would buy stuff out of distressed situations — receiverships, foreclosures, litigation — a whole number of crazy stories.

We needed to be the principal, or we'd be participating on the capital stack — debt, equity, LP, or whatever the deal was. We would either go in and participate, or partner, or operate ourselves. We looked at a variety of deals. I was a lot younger back then, so everything was interesting. We did a lot of deals in 2011. I have an entertainment company based in Las Vegas. We produce shows and theater in a number of casinos in Vegas, and the ticketing platform I created is still around, called Ticketbat. Ticketbat had a lot of problems: if you bought a ticket in 2011 and went to a message board about tickets, it would tell you how to get a full refund from the credit card processing company. So we started looking at alternative payment methodologies on the internet. In 2011, it was brought up to us that we should look at this new digital currency, Bitcoin. As an accountant or lawyer, I Googled it and it said people utilize this currency to buy narcotics on the internet. That sounded like digital video game money, so I just missed it. I said I probably shouldn't be involved in this. I have privileged licenses in gaming, banking, and legal, so I stayed away. But shortly thereafter, because now I was cognizant of Bitcoin in 2011, I read somewhere about the immutability of the ledger. As an accountant, it caught my eye. I said that's impossible — there's no such thing as an immutable ledger. That's the holy grail of accounting. The problem with all accounting is that people change the ledgers. You have human risk on a ledger, either fraud or human error. Human risk has been a problem in every industry, every government, every bank, every single asset that has to be monitored or reported. So there's a need to always audit the records. The only reason we audit records the way we do today is because all the records could be changed. An immutable ledger is really what they try to create in a lot of software programs for different industries.

Let's say you own a restaurant. You're concerned with people getting into your POS system and altering it so items don't show up. People are really creative about stealing — they come up with ways to not ring up five steaks, and then the customer pays cash and there's no way to see that because the ledger was changed. That exists in everything: car parts, manufacturing facilities, even donuts. Any business has a ledger. The basis for the entire world coincidentally is ledgers. The operating system that runs everything on the planet lives on a ledger. If the ledger is corruptible, then you could potentially have nothing. How does the bank know what you own? Only because there's a ledger. Your money lives on a bank's ledger. If somebody corrupts that ledger or deletes you, then the bank doesn't know you have any money. They have to audit the entire network to figure out what you have, and that could take a long time, especially if they were creative. And that's not just your money — that's your whole life. Everything could be altered on ledgers. So the work is to figure out what's real and what's not: what's true, what's faith, what's false, what's an error, what's intentional. That's what accountants do — they're trying to figure out the numbers to make sure they're right. Overwhelmingly, they're wrong most of the time from human error, and some of the time from fraud. Everything runs on a ledger. Ledgers are massively important, really boring, nobody wants to hear about the ledgers that run their life. For accountants, they're not that boring. But there's nothing more important to your life in terms of how you function every day than all of the ledgers that exist that people rely on. So that's the ledger part. Ledger technology is as important as it is, but you don't make innovations to ledgers. Since the beginning of human history, something this important — this is one of the most important areas of humanity, because how do you know the truth in anything unless there's a proper ledger? You'd think there would be innovations to this all the time. If you thought that, you'd be wrong. There's only been two innovations to accounting ever in tens of thousands of years.

Excel lives on the second innovation. The first innovation was: you went to a market, you bought five sheep. You have an asset, and you wrote down five sheep, whatever the sun and moon day was, ten thousand years ago. You were a big baller with five sheep. You saw the sheep and bought two more. At some period of time, 12, 18, 24 months later, you know how many sheep you have. That's the birth of accounting — the very first accounting network system, called single-entry accounting. Single-entry accounting: Frank knows how many sheep he has over some period of time. That lasted until the 1400s. In the 1400s, they innovated accounting and added a debit and a credit. Now you bought the five sheep and paid five dollars. You put five sheep, paid five dollars on your T-account, and added those up over some period of time. If you borrowed some money or paid with your own money, at some period of time you add all those columns up, and that would give you Frank's financial statements for the period. That was in the 1400s. Today, 700 years later from the innovation of double-entry accounting, nothing has changed. It's the same accounting that was used in the 1400s: a debit and a credit. The biggest problem with the system is that you can change and alter your records anytime you want. They're alterable records. The only way you can cook the books is right there. By the way, it's an analog system. The accounting that runs the world today — every bank, every corporation, every government — is 700 years old, it's analog, and it can be changed. It's completely alterable. That's why you see so much fraud everywhere in every bank, every government, every corporation all over the world. A lot of them have fraud constantly and human error. What you get is an accounting system that's really bad and needs tens of thousands of auditors going through your records every single day to make sure you're not doing bad things. The benefits to the fraud people outweigh the benefits to the auditors, who are limited in time and scope and don't have the same motivation. So you get crafty, very smart criminals and auditors that are auditing hundreds of companies, and they miss it. That's why you see fraud lasting for decades.

I have a 90-minute accounting speech, and I gave you the abbreviated version. That's the history of accounting: single entry, double entry. That's all I knew. I didn't even think it was bad. I thought that was the only system you could ever have. I just thought you have double-entry accounting, and every accountant, every new software that comes out, tries to add a layer of immutability — they try to say nobody can change this, you can rely on this more because it's so hard to change. What's an example of that? A point of sale in a restaurant. You buy a burger, they hit that you bought a burger, you owe seven dollars. They print your check, you pay in cash and walk away. They void it, they hit the void, and now there's no sale and they just pocket the cash. It's not 100% immutable. The goal always is how do you stop people from being creative? So how do you layer on top of double-entry accounting ways for people to conduct business that give the owners, who can't always be there, some semblance that what's going on every day is being recorded and tracked? The aha moment for me was an article that talked about the ledger. I don't think they used the word immutable, but it made it sound like you couldn't change the ledger. I looked at a lot of systems, especially in my business time. There are a lot of operating businesses that I have that always have problems. When I heard that this network could be immutable, and all I saw was such a contrarian view — from 'you could use it to buy drugs' to 'this is the best accounting ledger technology in the history of the world' — I was like, let me research this a little more. I went through everything. I started reading the white paper, all the ancillary literature I could. When I finished after a few months, I realized that it really was an immutable network. The genius of the network was that the guy never talked about accounting ever. It was an accounting-free white paper. If you wrote an accounting white paper, it would have been ignored by history forever. Instead, he writes a white paper about transaction rescission. This is how smart this guy is, or group of people, or whoever did it: they went to the first principle of how do you change the accounting in the world without changing the accounting in the world. The way they figured it out was on a transaction, if you eliminated the trusted third party. They took it all the way to the bottom and just said the accounting's the root. We're going to change transactions. They figured out the way to fix the world's accounting technology and provide immutability to transactions was to fix the rescindability of a transaction. If you have a permanent transaction, you don't need to know anything about the other side. If you have a transaction that could be rescinded, you need to know who the other party is, who the intermediary is that could rescind it, and what would happen if they rescinded it. They created a rescissionless transaction, which created immutability, which changes the accounting. It took me a few months to go through this rabbit hole of information, all ledger-based. I realized there are really three important concepts here. The first and root is a new accounting technology. That's the base. The new accounting technology changes transactions. After those two things change, it's economics. Economics are so much more interesting than accounting and transactions that 99% of the time you hear about the economics: the theory of what's going to happen in the world if this network is adopted. When I had this moment, I was like, wow, this is real. This is an innovation that hasn't occurred in accounting in 700 years. It's going to disrupt all records. What you have now is single entry, double entry, and through proof of work — which is really the innovation that drove the whole thing — you have a consensus of computers, not stakeholders. So no humans. For the first time ever, consensus is done by computers where they self-audit the entire chain to its inception. Once it's been audited and agreed by all parties, it's written to a third entry: triple-entry accounting. Satoshi did not call it blockchain; he called it a time chain, and I think that's an important distinction. Blockchains were invented in '91, so they were old. The proof of work concept he cites Adam Back, who created it for Hashcash. Another woman, Cynthia Dwork or Dworkin, also created something similar for email. This proof-of-work technology audits what humans would do, self-audits the entire network, and then writes it to the time chain. Once it's written to the time chain, it's immutable forever. You can only append it. I knew it was real. I looked around and said, wow, this is pretty amazing.

90% plus. I talk to people all the time. Nobody has a problem with 'validator.' Validator sounds great. I talk to people, representatives, elected officials, sophisticated business people. None of them know what a miner is. And what it is is really simple: it's a computer server. A Bitcoin miner is a computer server. Just like all the computer servers that live inside AWS, inside Azure, inside Equinix. They're all the same. Equinix buys power from the grid and feeds it to the servers. The servers in Equinix emit nothing. No pollutants come out of a computer server. Guess how much pollution comes out of your screen in front of you? Nothing. Zero. It gets hot and the heat dissipates. The heat was stored from the electricity. When you realize that a Bitcoin miner is a computer server just like the servers in Equinix and AWS, they live inside a data center. The data center buys power from the electrical grid. Inside a computer server farm of Bitcoin miners, guess how much pollution is emitted? Zero. Nothing. The pollution is emitted upstream from the energy generation facility. It's the same footprint as Teslas plugging into the electrical grid, the same footprint as your computer at home plugged into the grid.

If you look at it globally, no. Tumble dryers in the United States use more energy than Bitcoin miners globally. Christmas lights use more energy than Bitcoin miners globally. There's a big misconception: people don't really understand energy either. They don't realize energy and electricity are not the same. They conflate them. This is part of the Bitcoin Mining Council stuff, but it's the same information I've talked about for a long time. Journalists who dislike this network say Bitcoin mining is so bad for the world, we need to shut it off. It uses more energy than a small country — the Netherlands, New Zealand, I think they used Afghanistan the other day. They compare the global energy use to a small country. The problem is you need context, a framework. How much energy does this network use? How much energy is in the world? We know how much energy is generated globally. This stat is really easy to understand and super important for the industry. British Petroleum, Exxon, every single energy provider that generates energy globally puts out how much energy they generate. They all agree. The amount of energy generated globally every year is approximately 160,000 terawatt hours. That's the maximum that could be used in the world today.

I agree. As a Bitcoin person, I agree that the use of the energy is positive. The problem is explaining the value of this network takes a long time. I can explain the value through my accounting talk and my transaction talk. I'm not really good at the economic talk. But people say you don't need to explain how much energy there is — but you do, because we live in an environment where people are concerned about energy. Let's talk about it. The statistics are ridiculously on our side. So you know how much energy is generated globally: 160,000 terawatt hours total. That's the bogey. That's how much is available. When I was building a facility in the Appalachian Mountains in 2016-17, five years ago, I went from the basement to an industrial enterprise-grade facility. I'm building this 230,000 square foot facility on 70 acres. I have the mayor involved, the city council, investors, partners, and my chairman, my co-founder Mike Levitt. I'm giving everybody all the information about Bitcoin. The World Economic Forum writes an article saying the Bitcoin network is really bad and we need to shut it off because of its energy footprint. In 2017, they said by 2020 the Bitcoin network would consume more energy than the entire world. All of it. By 2020. We have three years until Mayhem. A funny video in China: a guy says, 'Do you know what happens if Bitcoin gets adopted? You're all gonna die.' Everyone is calling me, saying 'We can't do this, we're destroying the planet, we're going to use all the world's energy.' I'm like, let's take a breather and discuss what they actually mean. Newsweek piled on, saying Bitcoin could use all the world's energy. Thousands of other articles came out. I'm getting beat up. Here we are today, two years after the World Economic Forum said the world was going to end because of the Bitcoin network. They predicted Armageddon. So we know the energy available today is 160,000 terawatt hours. You would think we're using pretty close to all of it. How big is the percentage? How good are these analysts at the World Economic Forum that they would put out articles like this? You'd think they'd be good because they have trillions of dollars with the IMF and make all types of important decisions. So we know how much energy is used by the Bitcoin network today. Even the detractors agree the amount is approximately 250 terawatt hours out of 160,000. Two years after the Armageddon prediction, the Bitcoin network uses about 10 to 16 basis points of the world's energy. That's 10 to 16 one-hundredths of a percent. They were 99.989% wrong. The narrative that the Bitcoin network's global footprint is huge is inconsequential. If you shut off 10 to 16 basis points of the world's energy, nothing will happen. Out of the 160,000 terawatt hours generated every year, guess how many are wasted? 50,000 terawatt hours of energy are wasted every year — renewable, stranded, dissipates, transmission line loss, energy into electricity loss. The Bitcoin network uses 250 terawatt hours. Yet every article, every newspaper, every environmental cause focuses on the global footprint of the Bitcoin network using 16 basis points. There are real important, devastating environmental criminal acts that take place every day in our world's waterways in the air. Tiger King. Lead in everything. There are massive problems all over the world. To divert any energy towards this network that uses 10 to 16 basis points is intellectually dishonest. The global footprint is inconsequential. Nobody could argue that. The narrative is fake and false. The facts are 100% on the side of those who are pro this technology. Local energy is a problem if there's not enough energy generated to support a Bitcoin mining facility, a data center from AWS, a car manufacturing facility, or an aluminum smelter. If the grid can't support additional power, you shouldn't build anything there until they have it. You don't want to disrupt people's lives. On a macro level, it has zero impact. On a local level, it can have too much impact on a given power grid or region, like Texas. Any business that requires energy needs to be a good corporate citizen and ensure the energy is there. People conflate local and global. When we formed the Bitcoin Mining Council, I just care about this one statistic: people need to know on a global level it's inconsequential. It's inarguably inconsequential because most of the energy utilized would be wasted. You get an inconsequential footprint with a disproportionate amount of attention. You have to ask why. The reason is it disrupts the world because you now have a permanent accounting ledger that nobody can manipulate. You can't commit fraud on it, you can't alter it, you can't claim human error. The records are the records. It's the first time in human history you have truth on chain.

There's a lot of confusion because you have to understand the accounting layer to really understand the transactional layer. People who talk about the transactional layer have a lot of confusion. You really have to get to the root of transactions.

I like history. If you want me to bore you with a short historical reference, I think it's easier to explain my position. A thousand years ago, we don't know each other: Darin and Frank want to conduct business. If I'm in Asia and you're in Europe, I want to send you some value. A thousand years ago, I send you value. You don't get anything. You say I didn't get anything from you, you're a scumbag. But I sent it. Now I believe yours to come back. Because we're separated by geographic space and time, we cannot conduct business with each other. There's no way for us to know if you're a bad actor. This is my version of the Byzantine Generals Problem. I break it down into geographic space and time. A third-party verification system popped up. I send the value to the third party. They say, 'Feinstein sent it.' You say 'great.' Now they can send it to you. That transaction is only available for the first time in human history over geographic space and time because of a third-party verification system. That third-party verification system's root function is confirming transactions. That turned into a bank. All banks' genesis is confirming transactions between two parties, and they charge a fee. What does the bank layer on top? I sent a million dollars to the third-party verification system. Do you want the bank to send it to your house? No. You ask them to custodian it. The bank custodians the money. Those are the two root functionalities in today's age. Through the Federal Reserve, which is coincidentally owned by the banks, you're allowed to borrow nine times the amount of your reserves and lend it out. Now you have this million dollars in reserves, they borrow nine million, lend it out, and take the spread. All of this relies on one thing: that you and I cannot conduct a transaction over geographic time and space. It's impossible — until the Bitcoin network. Now, for the first time ever, I send you a Bitcoin. You see it in my wallet. You see it on chain. You see it written to the time chain immutably. I see you got it. Transaction culminated. That's the first time in human history a peer-to-peer transaction is available.

You're getting too far ahead. Let me go down this path. For the first time in human history, we have a peer-to-peer transaction that doesn't rely on any human, no stakeholders in the middle. It doesn't matter where you are in the world. Cross-border payments within 10 minutes with no human risk of error or fraud, instantaneously in your account, without a rescission ability. You have a digital asset in your wallet that no one can seize, no one can confiscate. It's yours. Now you have this Bitcoin in your wallet and a final settled transaction. What you hear all the time is: the Bitcoin network is so slow, it can only do four to seven transactions per second. Visa can do 1700. People say Bitcoin can't scale. The problem is that Bitcoin final settles four to seven transactions per second. Visa final settles zero transactions per second. If I use my Visa card and you own a restaurant, you're not getting the money until Monday or Tuesday. I get my bill in 30 days. If I disagree with the charge, I have another 60 days to contest it. 120 days later, Visa rips the money out of your account and says '[expletive] you, Frank Chaparro, file a grievance.' You could have had four to seven transactions final settled in your account, done. If it's important, that's what you want. Or you can go to a third-party verification system, the old way, and have 20,000 Visa employees on every continent, with CEOs, bankers, lawyers, lobbyists telling you you're not getting your money. You cannot compare a final settled transaction on the Bitcoin network with a credit system that's a stakeholder-led, CEO-run business. They don't do the same thing. Is Bitcoin going to compare with Visa? No, they don't do the same thing. If you're in China and I'm in Germany, do you want to wait 10 minutes and get it on the Bitcoin network, or send it to the wire system and have a bunch of banks tell you they're going to take the money out of your checking account? The same goes for Western Union. Once they get a hold of your money, it's in a stakeholder-run system and anything can happen to it. When people talk about Visa, they're talking about a layer two on top of the rails of another financial system. What they're building on Lightning and other products on top of Bitcoin are going to be these transaction layers. Layer one on Bitcoin is the only one that has no stakeholder reliability issues. There's no human fraud or human error risk. You're not at the mercy of the founders. There are no founders. You're not living at the benevolence of a bunch of people who could dictate whether you get your money. There is nothing comparable to this network that has ever been invented in humanity. What do you want? Do you want the money, or do you want a bunch of people telling you you can't have the money? On a transaction level, it's the first time ever you've had this ability. What you build on top of it will be enlightening. Strike, Jack Mallers' products, and many others are going to do amazing technology on top of this layer one. Bitcoin. Anyone building on top of another layer one technology is at the mercy of the founders of that layer one. They control it. If they're going to spend tens, hundreds of millions of dollars building technology, you want to build it on Bitcoin because Bitcoin is not at the mercy of the founders making a bad decision. Anytime you have a founder-run company, not just in digital assets, the failure rate for founders is 90% plus. So you're going to spend hundreds of millions of dollars on a founder-run layer two project when you could build it on top of Bitcoin and have no founder risk? No. Unless you own the layer one, then you're a founder trying to create revenue and sell your coins. The base root of all of it is accounting. We haven't talked about economics at all. That's not my area. Michael Saylor does it better than anyone. Nick Carter is amazing at economics.

It depends. There are a lot of miners that are not going to do okay, and some that are going to be just fine. The state of the industry looks like the state of the industry for the last decade. There are people well prepared for the down cycles and people that are not. In 2017, we had the down cycle of 2018. There's confusion on the types of Bitcoin miners; they're not all the same. In Bitcoin mining in 2018, I look at the infrastructure side. The people building the data centers are Bitcoin miners. The people buying machines and sending them somewhere else have an asset-like business model. They buy a commodity and hope to time the market. Those people have a lot of problems historically because they don't control their destiny. The infrastructure provider could go out of business. When I started mining in 2012, I had to send my equipment all over the U.S. — Washington State, Georgia, Nevada. None of it worked. The efficiencies were bad, the buildings caught on fire, the equipment got stolen. We had every problem you could have. In 2016, I said this is all I want to work on. This is going to change the world. I moved to the Appalachian Mountains to build the first enterprise-grade facility. There were no enterprise-grade facilities. To get to scale was impossible because nobody knew how to properly run this equipment. The heat signature is different than traditional data center equipment. There's no book at MIT for thermodynamic engineering on this. The engineers all have problems dissipating the heat signature. It's a complicated industry. The people who have built infrastructure data centers, well-capitalized and looking to the future, having gone through ups and downs, will weather the storm. If you're brand new, nine months in, you spent all this money and think, 'How could it go down 80%?' It always goes down 80%. It goes up 3, 4, 5, 10x, then falls 80%. People are shocked. I started buying Bitcoin under $100. It went up and fell 80%. My friends said, 'Oh, you just got crushed.' I'm like, 'It went up 400%.' It's a higher low and a higher high. The people who protected themselves will weather the storm. You'll see contraction. The people who bought a lot of machines with a business model claiming they're worth a billion because they own 20,000 machines will go away. That's the nature of this beast. If you buy as a commodity, you're beholden to the cycles.

It's the same thing it's always been. Power is fine. You can buy machines. There's power all over the world, lots of land. The only real bottleneck is infrastructure. That takes hundreds of millions of dollars to build, hundreds of people to run, and really complicated software to monitor. The only bottleneck in the industry is the data center. This Bitcoin mining thing is a server inside a data center. The only business we're in is building data centers. We're building data centers, and we can host Bitcoin mining machines. There's a shortage of data centers. They're making way more equipment than can be plugged in. Everybody buys the equipment and says, 'We're billions! We just bought 10,000 miners, we're rich!' But this is a long game. You can't pop into this thing and make hundreds of millions of dollars in 18 months. We've been grinding it out for 10 years, growing organically the right way. Core Scientific since 2017.

I'm out of ops, as you know. I have nothing to do with operations, finance, or any of that stuff. All I am today is Chief Vision Officer — they came up with that, I don't even know what it means. It means I get to come on and talk to Frank. That's what my title should be.

I think the most important thing is education. This network is not intuitive. People don't understand what it is, and they're bombarded with misinformation. This technology provides private property for the first time to 8 billion people on the planet, and it also provides banking because now you have a digital asset that's unseizable. You can remit money and transact payments on it. Half the world's population doesn't have banking, and 87% live in autocratic authoritarian regimes with no private property, and another 30-37% have double or triple digit inflation. Seven billion people go to sleep every night not knowing if their money will still be there. This technology is important to us in America, but we're 4% of the population — 330 million out of 8 billion. We're not the target audience. The target audience is the 7 billion who have problems every day. How do you get this technology into their hands? They're bombarded by people opposed to Bitcoin. The marketing people are smart. They say it's bad for the environment. Poor people, who are disproportionately hurt by pollution, are the same people who would benefit most from this technology. They're told it's so bad for the environment they don't want to touch it. We have to educate people. In 2017, when I was building the Appalachian facility, there were 2.7 million people on the network. Today there are over 100 million. Adoption has grown at record pace, faster than the internet. The question is how do we continue this outside the Western world to the people that need it the most. Education is critically important — both what this provides and addressing the energy and illicit activity arguments. On an accounting level, the easiest way to answer the illicit activity one is: if you're going to commit a crime, you don't want to do it on an immutable ledger that will track the criminal always. You want to use cash. You have to educate people on all these fronts. At the end of the day, you need really good developers building on this technology. It's similar to AOL. The internet: you had to plug in a disk, dial up, nobody could make it work. Paul Krugman said the internet would fail. Newsweek said it would fail. Everybody said it would fail. It's the most important thing in the world that democratized information. This democratizes economics, accounting, and money. It's going to survive all of it because nobody can turn it off. The question is who will build the Amazons and layer twos on top of this that will change the world. It's happening at a record pace. We're in the middle of it. Education and building on this network are super important. Ask anyone how the internet works. It doesn't matter. I don't know how the internet works because I could just use it. That's what's going to happen with these layer twos. They'll make the whole conversation we just had irrelevant. You won't need to know accounting and the Byzantine Generals Problem. You'll just have democratized monetary technology that's unseizable, that lives in your wallet, that you can use to bet. It'll be a whole different ballgame.

I'm on Twitter: @DarinFeinstein. That's it. I'm not a prolific tweeter. Since 2015 or whenever I joined, I have 600 tweets. But there are some good ones. All the facts I talked about today are on my Twitter — the energy statistics, illicit activity, proof of work, proof of stake information. The Bitcoin Mining Council website also has a lot of literature on the flak we deal with every day. Those are the two best places: Proof of Darin.

Thanks for having me. Good to be here.