An analysis of the present and a look at the future of Bitcoin mining, between data, critical reflections and a personal vision on the role of this industry.
Before jumping on bitcoin and proposing it to their clientele as an investment instrument, traditional finance started with a more classic approach, beginning to purchase shares of mining companies and thus exposing themselves indirectly to the asset. Bitcoin mining today is a real industry, also composed of large players listed on the stock exchange that have received huge capital from investment funds like BlackRock. Furthermore, more and more mining companies are taking the path of listing on stock markets to manage to attract capital and some of these also manage pools, like Marathon. How was all this possible and what are the implications of this situation?
Mining pools
Mining pools aggregate the computing power of multiple miners to increase the chances of mining a block. They create the block template and use the collective hashrate to try to solve it. The reward is then divided among participants in proportion to the power provided.
Today pools use different methods to pay miners who provide computing power. One of these is called FPPS (Fully Pay Per Share), which offers a fixed and constant payment to the miner (which varies based on the computing power provided), regardless of whether the pool mines a block or not. This type of payment makes the revenues of a company that mines bitcoin calculable and constant and which, consequently, becomes more appealing to the market because it’s possible to calculate its ROI (Return On Investment). In essence, with this type of payment, uncertainty is excluded and returns are made predictable. Mining pools take on the risk because, in case they fail to mine blocks for a certain period of time, they could go into loss having to pay miners anyway. We can therefore venture that mining pools have helped the entry of traditional finance into bitcoin mining, taking on part of the risks. But this is my thought.
Mining today
Mining pools today are not that many and we have a strong concentration of miners in some of them. If we sum the hashrate of Foundry and AntPool we exceed 50% of global computing power. This is not an optimal condition. Now however let’s also look at the other side of the coin. First of all, although mining pools have great power, they cannot play with fire and must be very transparent about their operations towards miners, because miners can direct their hashrate towards another pool very quickly. And this is a fundamental element that also recalls game theory a bit, because a mining pool must not only serve its own interest, but also the interest of its “partners”, otherwise it loses everything. I believe that mining pools are well aware of their power and also know that they are a centralization point for the network and, today, also a point of attack by authorities, so they have every interest in finding solutions that allow them to continue doing business, but that relieve them somewhat of responsibilities.
On the miner side instead, we have increasingly large companies that collect enormous capital and produce a lot of hashrate, but my fear is that this hashrate is produced by a fiat economy and is very precarious. Hashrate is closely linked to price, because if the price drops below a certain threshold, miners are no longer profitable and are forced to turn off the machines, or, in the worst cases, to completely cease activity, consequently causing hashrate to collapse. Fortunately Bitcoin has mechanisms like difficulty adjustment that mitigate these situations. Being still a very small market, the entry of large institutional players first in mining companies and then directly on the underlying asset, could lead to strong price oscillations that also impact mining farms. All this makes hashrate very unstable too.
Something is changing
The development of Stratum V2 has started an attempt to solve the various problems that afflict pooled mining. Stratum is the communication protocol between mining farms and mining pools. Version 2 brings, in addition to data improvement and encryption, performance increases and gives each individual miner the possibility to create the template of the block to mine. Furthermore we also have other existing solutions that try to solve the problems described before in a somewhat different way, like Ocean pool, which has implemented its DATUM protocol (similar to Stratum V2) and which uses a miner payment method called TIDES, that is an evolution of FPPS and non-custodial PPLNS in which miner addresses are inserted directly into the coinbase transaction.
There’s also a lot of ferment on the miner side, for example with the advent of Bitaxe, an open source project that we can define almost as a movement, an ideology. Skot, the precursor of this movement, has essentially reverse engineered the professional machinery used to mine bitcoin and managed to create a “desktop” device that contains a real ASIC chip, consumes only a few watts and can be built at home. Obviously these products produce computing power not sufficient to try to be competitive, but they are bringing back solo mining and are giving enthusiasts the possibility to deepen this sector by exploiting a device of very small dimensions and with practically negligible consumption on the bill.
The future of mining
After analyzing the state we are in, we can start speculations and let our minds travel.
Let’s start with mining pools. Will they still exist? I would say yes, in what form I don’t know, but I think they will certainly lose the control they have today over block template creation and I also think that future solutions will be found (in addition to existing ones) to become non-custodial and directly remunerate miners. In the end it’s in their interest to always be competitive in terms of services offered, because they work on commission, so they have to be appealing.
As for miners instead, I see a bigger metamorphosis. If the intention is to consume eco-sustainable energy, then energy industries will necessarily have to start studying the benefits that mining can bring in this sense. They cannot continue to ignore them. And if this happens, then I imagine a future where energy companies themselves will start mining bitcoin and will no longer do so following market logic, but will shift focus to stabilizing the electrical grid. Mining is currently the only industry capable of being so flexible as to be able to absorb all the excess energy of a plant, but at the same time consume zero when energy is needed by the grid. At that point the raw mining activity could become no longer the main business, but a secondary benefit that will allow them to have alternative income compared to selling electricity.
And what about the Bitaxe movement? Hard to say, but in my opinion if it manages to reach a critical mass of enthusiasts, it could really start to emerge and become a fundamental piece for the “true bitcoiner” kit. Utopistically, if we had 50 or 100 million Bitaxes scattered in people’s homes, we would manage to distribute mining in a more widespread way, but above all we would have a part of the total hashrate totally uncorrelated from bitcoin price, because, given their very reduced consumption, Bitaxes would remain on and continue to produce hashrate regardless of energy cost or price oscillations of the underlying asset.
What will happen, then, after 2140, when no more bitcoins will be mined? Assuming that network fees will be much higher than today, and sufficient to keep the activity profitable, we could find ourselves in a situation where mining for pure profit will be downsized. The same companies, however, could become external service providers for grid balancing, or, as mentioned previously, become electricity producers themselves of renewable energy exploiting their experience in mining to push where today it’s not economically convenient. Even in our homes we could have a boiler, a heat pump or a water heating system for the pool that, while doing its job, also mines bitcoin. In short, a future that seems like a fairy tale, but so possible that we want to live it and make sure that my children are also protagonists of it.
