On this week’s podcast, we present Ethan Vera, Co-Founder and CFO of Luxor, North America’s largest mining pool serving Bitcoin, Zcash, Dash, Sia and other crypto communities. Luxor is working on building a more transparent mining value chain and financial instruments for miners. Before founding Luxor, Ethan was an investment banker at Goldman Sachs. Ethan advised MNCs on cross-border Asia M&A (buy-side, sell-side, take private, private placement and activism defense) transactions across the semiconductor, renewable energy, and internet industries. Prior to Goldman, Ethan worked in Asset Management at Royal Bank of Canada, helping manage pensions for some of Canada’s largest institutions.
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Transcription
And we’re live.
Hey everybody. It’s Ethan. Zerka here not to be confused with our guests, but I’ve got my business partner over here. Sikkim Sikkim please introduce our guests today.
Yes. Today we have a Ethan Vera and Ethan Vera is from Luxor which is North America’s largest pool. And, and they support many different coins including a coin on their on their pool. Ethan, please introduce yourself.
Yeah, thanks for having me on guys. Lexi keeps said I run Luxor. We founded about three years ago. Today really is like an old coin pool. We saw all of those altcoin communities and thought they were underserved from a pool perspective, so wanting to get them a better product offering. And then, yeah, continue to build out spend about 90, 95% of my working hours now in mining. So you know, love talking pretty much anything in the entire stack and excited to be on here with you guys
Before you tell us w what’s your into today, tell us how you got here. What, what the, the path that brought you to where you are. So you said you’ve been a part of Luxor three years, so you probably are kind of an, Oh, gee, you go way back. So tell us how that happened.
I guess three years is now getting a OJ status. We’re seeing like a new wave of institutional miners come in. So three years is actually a long time for some of them. Really I was, I was in college at the time doing my fourth year finishing up and my co my friend, and now co-founder Eddie kind of dragged me into Bitcoin and mining. He was like, Hey you to check this out. This is like an up and coming technology. And really my fascination with Bitcoin never broke away from mining. The mining aspect was the coolest part for me that instead of having essentially plant fed that determines the supply of money, anyone with a machine electricity and internet can take part in that minting process. And, and that was fascinating to us. And so we wanted to build products around it. And as like college kids with no capital funding, like what can you build it? We thought, Hey, let’s build some software products. Eddie and Nick are both software engineers, so that’s probably where we can play best. And, yeah, so we started started building software products for the mining space.
That’s really awesome. That’s really awesome. I mean, when I first got into mining you know, I was, I was doing GPU mining and, and, and basically, I, you know, I see that you went to the software route instead of directly going into the mining route. Tell us,
Did you have any stumbles or, or road bumps along the way?
Well, funny enough, that stumble was actually when we tried to play in the infrastructure space. We originally had the company vision of software. But we, we had this idea and maybe it sounds like better than it actually is in practice that vertically integrating sometimes it’s vertically integrating always sounds great, I think, but at times maybe it’s like a ball and a weight on your foot when you’re trying to swim. And so we actually invested in a mining farm in Kansas city called minery tech. We were a minority shareholder, but it ended up going pretty poorly you know, fast forward 12 months later, it went bankrupt. And it helped us realize a couple of things. One we’re not infrastructure guys. So we have a lot of respect for guys that do do it, and it’s really tough work. And then to the, the mining industry is just so volatile, the value of hash rate switches around so fast. We’re seeing it now with repertoire hush down below 8 cents, a Proterra hush per day. And so the inability for miners to hedge out their operations or, you know, transfer some of that risk to investors can really lead to volatile business models. And how many bankruptcies that we’ve seen this year you know, 10 plus. So I think that’s gonna continue as long as those derivatives aren’t here to, to help miners. And so that was some takeaways that we had, and it was a stumble we had, but also a great learning experience.
What do you feel is a, is, is just mission critical to success? Like what do you feel is maybe like the biggest mistake that miners make these days?
Biggest mistake? I think there’s probably a lot I think probably relating like to your business, like the broker side of the business buying machines at the right price is increasingly vital to the success of an operation people that have good basic procurement, well, we’ll have an advantage, a leg up for the long run. And you’re kind of seeing like some types of cartels forming now on the, at least the latest gen machines where they’re booking out three, four months supplies of micro BT, or bit made in the future mid and small size miners can barely get their hands on, like, you know, a hundred, 200 rigs. So those players are gonna have like a huge advantage moving forward. I think if there are small players that want to play profitably, they have to know how to navigate the secondary markets. Well, you know, working with guys like yourselves and anything that dollars per tear hush down on their cap run.
Yeah, absolutely. That was an awesome answer. So I had a, I had a question, Ethan, what percentage of hash rate would you say that your pool you know, as a part of, for Bitcoin, let’s say,
Yeah, a Bitcoin we’re still relatively small because we’ve historically focused on all coins. So our largest bulls right now are like dash. We have about 25, 30% of the network hash rate. Oh, wow. Horizon about 40 [inaudible], five to 10 CYO, ground 30. So relatively strong into all coins. Bitcoin, we’re just scaling up now. So around 120 petahash as of this morning but that’s definitely gonna be a focus moving forward.
Why, why is it becoming a focus? Why do you just not let me, let me ask you this. Do you see
That the altcoin market is maybe going to have some turmoil?
It’s hard to say, right? Like everyone’s kind of lost interest in a lot of these like OG coins, like a coin, for example, like dash or Z cash, you know, defies a little bit more shiny now. Like why would you buy, you know, Z cash when you could buy a uni or a wifi? So I think there is going to be some momentum loss out of a kind of traditional proof of work, awkward markets, but in the next retail boom I think there are a lot of people that will, I, things like light coin, dash and Z cash and we’ll get support behind it. So it’s hard to say for sure. I’m a, I would say optimistic, but definitely not pessimistic either.
So I want to know your thoughts on wifi. For those of you who haven’t heard of wifi, wifi is a coin that like literally started out around $34, I believe. And in less than a year, it has just skyrocketed from $30 to 40,000 I think was, was the top of where it reads. So what are your thoughts on that? How, how does that happen?
It happens because it is just, everyone wants to buy on the exchange and no one wanted to give it up. Why, if I had a really good thesis of like a very limited supply of coin and a hard cap I forgot what is it in the tens of thousands? It’s very small. And so I think there’s like some element of scarcity there in a day when everyone has like millions and potentially billions of points outstanding. But why should the principle itself of like aggregating yields is definitely interesting, especially in today’s era of yield farming. And so it seems like the perfect play for defy. I probably only spend a fraction of my time looking at defy mostly because my mining is a full time job, but it is something we actively look at. Like how can we integrate those types of yields for our miners to earn extra return on their balance sheet? Because treasury management for minors is a huge part of their business. We’re seeing that now with partnerships between like pooling and block pie, like how do you mind reward and then earn an extra reward you know, staking it, or yield farming with it or loaning it out on something like log. So it’s something that we’re looking at for sure. And monitoring closely.
Can you explain a little bit more in depth what yield farming is and how it is different than traditional farming?
Yeah. And I don’t know if I’m a best place to be the defy expert on the panel here. You actually, you, you probably know more than me then. My understanding of it, it really is, you’re just providing liquidity for these underlying protocols and you’re getting rewarded as a result. I don’t know how sustainable some of these things are. So some of these projects are giving like 6000% AP wise probably a mix of both that it’s a very risky investment, but also that there is greater fools that will demand that liquidity. And so how long are there going to be greater fools for? I’m not sure. I think that eventually, like the end game of this is that AP wise will have to come down somewhat similar to centralize finance. Defy is nothing like special that you can yield like 6000% APY for the rest of our lifetime.
So I think it’s a matter of time before it starts coming down. And then if I will become a little bit less shiny. Yeah. I think you’re right, because whenever you have something that has inflation massive inflation like this, there’s gotta be something on the other side that balances out and the price eventually catches up to the inflation. So it’s just a matter of time, I think. And as you said, you know, projects that are actually decentralized more decentralized and our mind using electricity something like that, or like coin you know, I think they, they will be more appreciated in the future once this defined wave is gone. Yeah. Yeah. Very
What do you, do you have a personal favorite? Do you like, what, what are you mining right now? Personally,
My mining personally I have a huge shot, two, five, six rigs and a couple of Equihash I think Equihash has always had like a soft spot in our heart Z cash horizon where some of our first pools, and then we built Komodo and power chain after. And the reason we love it so much is because there’s really good profit switching opportunities between the chains. So Equihash is the underlying algorithm, which you can find on like a Z, 1189 an hour. That means a Z 15. You can mind Z cash is the predominant one, obviously like 70% of the market cap of those coins horizons, probably 20 and the rest of the tens filled by other coins. But there’s really good uplift opportunity there if you mind, between chain. So our profits switching algorithm has been doing like five, 6% uplift over Z cash, which is like pretty insane for a mining operation, especially one that’s operating at the margin.
So that’s been like very fun for us to develop. We’ve kind of like geeked out over it. And yeah, it’s definitely like our personal favorite. It’s sort of like a dual mining for GPU is, you know, you’re, you’re getting an added benefit with whatever your mind. Yeah. We, we switched between chain. So at any given point, your, your rig is only working on a single chain. But we switch it every like three, four minutes we update. Okay. Which one is, which of these coins is the most profitable of mine on a Bitcoin basis. And let’s switch over to that one or potentially switch over if you’re already mining it, then we can just stay. Okay.
And, you know, you mentioned previously you want to get more into the SHA two, six
Mining algorithm. Can you tell us a little bit more about that?
Yeah, it’s actually not that intuitive, but starting with a Bitcoin pool is actually pretty tough. Mostly because the mistakes you’ll make, if you build your pool from ground up and don’t leverage existing code is like, you’re going to make mistakes along the way we’ve made plenty. And fortunately they don’t cost that much on you’re an old coins, but if you’re say orphaning a Bitcoin block, like you’re, you’re burning a hundred K, right. Like is an expensive mistake. And then second is like the liquidity required. So in today’s world almost every mining pool operates on a pay per share basis. So paying out on the expected value and you’re paying miners up out front. And that means that as a pool operator, you got to absorb that variant risk. And if you don’t have a large liquidity pool, you could actually bankrupt yourself. And so for something like Bitcoin, you actually need quite a bit of liquidity to cover that upfront payment. So you know, for us starting the company out of college, like we didn’t have that. So by building up these Alcorn pools, we built up a war chest, but we also built up a stabilizer where if we have a bad month buying Bitcoin, maybe you had a good month buying dash. They kind of balance each other out
[Inaudible], that’s very smart diversify. Yeah, exactly. Yeah. I noticed that you have a Zen horizon, and now I started mining Zen when it was, you know, back like I think less than $3. And you know, many, many different tools. I think I used your pool at one point as well. But yeah. How long have you had Zen on your pool?
Since 2018, I would say very few minors stick with us for just horizon. Now those miners will come over to switch because we do about like 10% uplift over Zen right now through our profits switching algorithms. So we’ve slowly tried to migrate people over. There are some people that want to mine, like a native token and that would mostly because they want to support the project or they, they are really bullish on the token and they want to get paid out in it. And so those would kind of be the exceptions, but everyone else is more like profit driven, like give me Bitcoin, give me more uplift type thing.
Right. So it’s no secret that you have competitors in the market. And you know, sometimes these competitors can do shady things to you guys to to prevent it. I, I’m not going to name any names, but can you give us a, an update on, you know, what your, your security situation is? Have you had anything interesting happen? Security wise?
Yeah, I mean, you’re right. Like there, the mining pool game is very competitive. It’s very cutthroat and in some ways it’s very zero-sum. So if one pool loses it’s at the benefit of every other pool there’s quite a few attacks you can on mining pools. Obviously the standard ones like DDUS, but one of the more like creative attacks you can do is what’s called like a block withholding attack where basically another mining pool will redirect their hash rate, proxy, their hash rate towards your pool. You’ll be, you’ll be paying them for their hatchery. Cause you don’t know who they are. You just know that they’re giving you valid work. But they have a way to check to see if that the share that they’re providing you is actually a valid block or not. And if it’s a valid block, they’ll discard it. So what they’re doing is basically sending you junk work. Yeah.
They’re sending you useless stuff.
Exactly. Yeah. It’s like from a technical perspective, it’s a hash value that results lower than the shared target but not lower than the network target so that it’s still counted as a valid share by the pool, but they know it’s not going to be counted as a valid share or a valid block.
So shady that is so underhanded and the end, if they send enough of those, they can, they can definitely do some damage.
Yeah, yeah. A paper Charlotte pool like us, they can bankrupt us. I suspect it’s happening to slush pool in the past too. And for a score based system or PPMS like slush, basically all their customers will be like mad at them and want to leave because they’re not mining as many blocks as they should have. So it hurts both types of payment method pools. And yeah, it sucks to deal with. Yeah.
And, and I’ve had this happen before where, you know, I’ve mined empty blocks on, on many different pools and, and you know, I didn’t notice it until maybe a day later. So, you know, you’re, you’re mining for nothing for that point for that time. Yeah. Yeah. That’s just like I said, just, just wasted noise. We’re going to take a quick break here to to take a look at our sponsor today. Sikkim can pull it up. Yes. I’m going to pull up our website here, Cryptomining.tools and Cryptomining.tools here. We have our calculator app or comparison app and our shop, for example, we have the best selling miners here on the market. And at this moment you’re also able to go into our directory. And from our directory, you can select what type of hosting you want.
You select what minors you have, and it’s a really easy process to to basically request a quote from any facility worldwide. Yeah, that’s, that’s absolutely fascinating. So Cryptomining.tools is a place where you can educate yourself. You know, what the most profitable miners are. You can then compare that miner against the miners in the market to make sure that, you know, just like Ethan, you mentioned before that it’s all about, you know, getting the maximum yield for your capital expense. And then once you’ve decided, you know, what,
Minor is a good fit for you, you can go to the shop and you can look around at our inventory and you can buy that minor, and then you can find the best hosting because that’s another part to it as well is it’s not just simply getting the maximum yield on your purchase, but also making sure that that minor is running a facility that has, you know, electricity costs and you know, maintenance that will keep your minor online and keep it hashing. So you can get the most out of it. And we’re always adding new features to our calculator. We’re adding profitability features as well. We have we’re developing a backend for for brokers as well. So we’re in this constant development mode. Yeah. Yeah. Every day changes and improvements are being made to the website. So, so visit often and we’re hoping to bring online many different algorithms here soon. So you can calculate not just for Bitcoin, but many other coins. And we also want to bring online GPU products as well. So yeah. So back to you, Ethan what can be done? Do you guys do any special or, or precautionary measures to stop this underhanded hash rate that can be sent to your pool?
There, there is no like foolproof way to stop it, but what you can do is you can monitor a mining luck per rig and per user account and see like, Hey, this minor like has been paid out six times as much as they should have been. They still haven’t found a blog. And unfortunately what you do at that point is you just freeze their account and say, Hey, can you contact us? Let’s like set up a quick call on who you are. It’s only happened twice.
The number you have reached is
Exactly right. Like if they’re an honest actor, they’ll they’ll take a call. It’s only happened twice and both times, like it ended up being like, you know, somebody who wasn’t a talking our pool and we just unfroze their account balance and they continued to mine and you know, the mining log ended up just being bad for that period. I think like really that taking that precaution is all you can do at this point.
Okay. So you have some sort of system that evaluates the luck across all the workers. And if you find some workers that are having some very unusual, low luck, that’s when you will contact them and say, you know, Hey, we’ve noticed some unusual activity in your account, please contact us and let’s discuss what’s going on.
Exactly. Yeah. So mining luck follows in Earline distribution. So based on a percentage like luck statistic you can see like what’s an over a specific, like a block amount. You can see, like what’s the probability of this happening. Let me just real rough numbers out there, but say you have a luck statistic of like six over 10 block period. You can determine, Hey, that’s like, there’s a 98% chance that shouldn’t have happened. You know, if we ran that back a hundred times, 98 out of a hundred, it shouldn’t have happened. And then you can start to set some like intervals of like, okay, at 99.9, let’s freeze their account because that’s like extremely unlike like unlucky, maybe there is just like percent chance that it, it was just pure mining luck, but let’s at least check.
I know that casinos do a very similar thing. They will, you know, measure the input and the outputs of their table and to a very, very fine degree. They can determine if any kind of cheating is happening because they know to a very exact number that for X amount in X amount should be paid out. And if any more than that gets paid out, then they start looking into people cheating and whatnot. Yeah.
My name is like a paper share mine pool is the exact same as a blackjack table. Right? Like as the, as the pool operator and the dealer, you know, your odds are set in the long run, you know, you’re going to make that say 2% spread, short run, who knows what happens. Sometimes you may be up a lot. Sometimes you may be down a lot, but yeah, like you said, like at a certain point in time, the distribution will fall so that, you know, like, exactly like, okay, this is a, you know, too low or too high for the, the time horizon where like you can’t
You’ll have a standard deviation basically. Exactly. so Ethan, I wanted to ask you what sets Luxor apart from other pools? You know, please please talk about that. Okay.
Yeah, I think I was mentioning earlier the pool space is competitive. It definitely is. There’s a lot of great pool operators out there. I think everyone really is rushing to fill this like ecosystem play. Your people are realizing that a standalone mining pool is kind of outdated. It’s no longer going to be the future of mining. And so there are companies like pool in that are like rushing to add financial services. And like slash school is doing the firmware integration. So trying to do like a broader ecosystem play. I Luxor we’ve been focused on a couple of things. One is profit switching. So I think the days of like single chain narrow focus mining, or almost over miners are majority profit driven. So if there’s ways to squeeze out extra profit you kind of need to do it as a pool operator.
So like now we kind of think of ourselves as more of like a best price execution where we’re, we’re accessing deeper liquidity than just the Bitcoin emission rate. You can access things like the Bitcoin cash BSB, digital bite, nice hash, maybe like sell it onto a contract, sell it to another pool, whatever, like you need to have like a whole order book of like different liquidity partners whether that’s networks or other companies. And if you can access all of them, you can get a better like profit return for the hash rate. And ultimately what you can do then is then pay your miners out more for their hash rate. So that’s obviously an area we’re very focused on. And then second would be building a hatchery based derivatives. It’s still a bit far out, but we really think that the market needs like better instruments to hedge for minor. So we want to play a role in crafting some of those derivatives and getting them to market.
Can you give us a little bit more in depth explanation about that? I find that fascinating. So explain what it is and you know, how you guys intend to bring it to life.
Yeah. This concept really came from looking at traditional industries and, and before Luxor, I was working at Goldman Sachs as an investment banker and a lot of our clients, right, are either commodity producers. That’s the resources w w any type of manufacturer and an integral part of their business is hedging out some of their Ford revenue. So they’re producing an unload underlying commodity. Let’s go to a simple example like oil. They don’t want to take a directional bet on the price of oil in the next two years. So they’re going to lock in a value per barrel of oil, and they know maybe for 60% of their operations, this is how much we’re going to get paid. And so that if oil drops to $20 a barrel or negative they’re not going to go bust. They still have the ability to sell it at their Lockton price of say $60.
So it’s taking these traditional concepts and bringing it into a new space. Mining mining is still the wild West, but it’s quickly transforming to a more institutionalized industry. So it’s like, how can we bring those traditional concepts to mining? What these Asics really produce is computational power. You know, a shot dude, five, six rigs produces shot two, five, six computational power Z 50 and produces Equihash. And so we want the ability to hedge on the underlying commodity that the, that the machine produces. And so building derivatives on the value of how trade itself I think is extremely important for a hedge. And so that’s really kind of what we’re focused on is like building futures, where you can lock in the value of, of hash rate. And so as like, just wrap it up here, like, let’s say hash rates at 7.50 cents a terahash per day, right now we want to create a product where you can hedge out a year and a half and sell it forward at, let’s say like 7 cents or six and a half cents. Like maybe you take some hair cut on it, but you lock it in for the foreseeable future.
Right. So can, can you give me an idea of, of what this hash rate could be used for? You know, if you’re going to treat it as a commodity, is it a commodity that’s only going to be able to mine Bitcoin, or is it a commodity that’s going to be able to do something else?
I think computational power is a whole, like, you can get quite like, have a good imagination of every aspect of, you know, the digital society will touch for like shot two, five, six. It’s obviously a very narrow focus. Usually 85, 90% of it will end up on the Bitcoin network. You know, some of it will end up on other like Bitcoin cash BSB, terror point here. Yeah. There’s like probably 10 others. Right. but those are, those are the main ones, for sure. So it’s a very interesting dynamic, like compute power itself is an interesting asset class. It’s femoral by nature. It’s kind of like electricity where you can’t store it. You have to use it. Or
Once it’s used, it’s used like, yeah.
Yeah. And you can’t hold it. Right. Like right away, you need to have a basic system. Yeah. It needs to be, you need to have a stratum enabled endpoint preconfigured year to mind the Bitcoin or other networks. And if you don’t have a configured already, it’s like, it’s wasted shares. So it’s an interesting asset class as it is. And then you tack on the fact that the end customer is actually like a blockchain instead of like, say like for oil, maybe like an airline industry. Now you’re, you’re swapping out the airline industry for blockchain. It’s it’s fascinating.
It is. I know that there’s a lot of you know, a nice hash as a marketplace for hash rate. And so I think that’s something that you’re trying to bring into the industry as a as a standard. If we can standardize that, I think it’ll, it’ll really help the the large operations as well. Yeah. Very interesting things are happening. Where do you see, let’s look further into the future? Where do you see things going? Let’s say five years from now,
Five years from now, I suspect like at least 50% of hash rate will be exchanged traded. Right now hash rate is traded like over the counter style between miners and mining pools. Like miners will go to a mining pool and negotiate a special fee directly, like how to contract with them and sell them their hash rate. That’s OTC. It’s a very I think immature way to run a commodity industry. And it results in a lot of the ways that that miners hate mining pools is like, they don’t know if they’re getting paid the right amount. They don’t know, like there’s no transparency there,
No market competition or transparency.
So, yeah, like how, how do miners compare like mining pools? They usually run like 10, like machines on the H for like a month. Like that’s a really bad way to determine who’s more profitable. So I think it’s a natural transition that the majority of hashrate will swap over from OTC to exchange traded. And then the benefit of exchange traded is that there’s no transparency, you know, exactly why you’re getting the rate. You’re getting, you can see the order book, and then you open up the buyer universe. There’s tens of thousands of sellers of hash rate being minors. And there’s only like a handful of buyers, the mining pools, that’s a really imbalanced market. And so you can add more market participants on the buyer side, you should start to see the value of a hash rate increase.
And do you think that will also increase you know, just, just the value of the coins themselves in the market as well?
I don’t know if minors have like a huge on the value of coins.
Obviously if they don’t sell what they’re mining, then it creates you know, more demand than there is supply and, you know, biologic that should you know, increase the price,
Right? Yeah. Yeah. I think it’s going to be really fascinating to watch. I think there’s going to be less and less miners just holding their coins and Bitcoin versus leveraging their balance sheet. Mining is obviously a very tough game. Now margins have come down significantly. So if you don’t have good treasury management you’re kind of at a disadvantage. I I’ve perceived more and more miners wanting to like, earn Bitcoin, obviously sell enough for their OPEX, but then start like loaning it out on things like block buy or other services where you can earn like a 7% APY and then try and get some return that way. So some of those contracts are really interesting because you actually have to lock it up for that long, so you can lock it up between CapEx cycles. So like, you make a bunch of Bitcoin you know, you’re going to crypto mining tools to buy miners in four months. Like for those four month period, like earn some return on it and then maybe you can buy more minors. Yeah. Well guys, we’re getting to the end of our podcast here. Ethan, how can people reach out to you if they want to get in touch with you? Yeah, I’m on Twitter. @Ethan_Vera
And I’m like, I’m like, who’s posting on her, my name who’s. Oh, that’s that’s Ethan veer. It’s not Ethan circa. Okay.
It’s a team effort, man. Right. We’re bringing each other up. Yeah. So you can find me on Twitter there. We also just launched a new website called hashrateindex.com kind of aggregating, rig price, data tracking public mining companies and some of their like trading multiples. So yeah, feel free to jump over there, all the data’s free. So feel free to use it and give us any feedback. If you think there’s some cool analysis we can add.
Really awesome, man. Yeah, that is, that is really helpful. And yeah. Thanks for being on our show, Ethan. It was, it was really good to to speak with you and to give my best to Nick. Nick was our, our first first on the podcast, so yeah. And just, just like Nikki were very fascinating, had a lot of great insights.
Thanks for having me on. All right. All right. See you guys. All right, everybody.