There’s something about setting up a computer that prints out a digital currency while you sleep. It could be knowing that you are turning electricity into a globally tradable commodity. It could be knowing that you have established your stake in a global socio-economic experiment much larger than yourself. Whatever it is, the concept of digitally “mining” something is captivating by nature. This incentivized distribution and transaction verification mechanism is the backbone of the Bitcoin network and all blockchain based transfer of ownership protocols.
The open-source nature of mining has created a competitive and volatile market that has evolved dramatically over the past two years. Although the mining industry has flourished, concerns have risen with the network’s current state:
• Vulnerable to Centralization: The “51% attack”, if some entity were to acquire a majority of the hashing power of the network it could therefore uproot the time-stamping verification mechanism that prevents double spending transactions, it could reverse transactions, and ultimately make its own blockchain the longest effectively destroying the transaction security of the protocol. Last month Ghash.io, currently the largest mining pool, controlled over 50% of the network for a few days. They have stated that they will do everything they can to stay in control of under 40% the network but can we still consider the network decentralized?
• The Incentive for Miners: As more hashing power is added to the network, the network difficulty increases (to sustain the distribution rate) and therefore more investment in mining equipment is needed to make mining profitable. The entire network gains about 800 TH/s every day. Even early adopters with access to capital and ASIC Machines still have small margins when taking into account all of the costs associated with mining. Will miners continue to make investments in the next generation miners needed to make a profit?
• The Need for more Full Nodes: One of the main concerns regarding the network is that there are not enough fully validating Bitcoin client nodes. By running a full client p2p node like Bitcoin Core you are actually becoming a node on the network. If you are running an ASIC Miner most likely you are not running a full node. It is important to distinguish full nodes versus ASIC miners. Full node clients take time to load the entire blockchain history as it is almost 20 GB. There are currently around 7,000 reachable full nodes in the world (according to getaddr.bitnodes.io). How can you create incentive for people to download and setup a full node core client versus just buying an ASIC Miner?
Is the solution a new proof of “x” mining algorithm in the open-source bitcoin core software or will the Bitcoin network fix itself overtime?
The Evolution of Mining Hardware
Bitcoin mining is a combination of hardware, software and networking. Originally, mining was done by CPU processing power, then it was augmented with GPU graphics cards, and in the past year hardware built specifically for mining Bitcoin, ASIC Miners, have come to dominate the network. The first ASIC Miners came in the form of USB Miners. These rigs were comprised of a couple 336 M/Hs USB workers, a powered USB hub and a Raspberry Pi to run the mining software. At one point these USB ASICs were going for around $100 a piece. However, with the exponential increase in the difficulty over the past few months these miners have dropped in price significantly and have become obsolete in regards to mining to make a profit. The more powerful miners that once were thousands of dollars also dropped in price with the increase in difficulty. This made investments in more powerful hardware (Block Erupter Cubes running 30-38 GH/s, Antminers 100s of GH/s, and Terra Hash Miners) more affordable for miners. The drop in the price in mining hardware has been driven by the price of Bitcoin and the difficulty of the network. The price has gone from roughly $1,000 in January down to around $450 and has been between $600 and $650 for the past month. Over the past year the difficulty and hash rate has increased at an exponential rate. The hashrate has doubled in size every three months effectively making existing miners less of factor in comparison to the network as a whole.
It is important to note that if the price of Bitcoin increases, and the difficulty and hashrate decrease, the price of all mining hardware could increase substantially. However, if the current pattern of the difficulty and hashrate increasing continues, then the price of mining hardware per GH/s will continue to decrease over time.
So can mining be profitable? Yes, but it really depends on the time when you buy the hardware, your electricity and spacial capacity, and ultimately the price of Bitcoin. You could mine 10 bitcoins over a 6 months period and the price of those 10 Bitcoins could double overnight and you will have made a profit on your capital investment. On the other hand, the difficulty and hashrate could increase to where your once very effective miner that would make daily pool payouts now takes maybe a few days, even weeks to payout. There needs to be a way for miners to validate their own blocks and be compensated in proportion to their hashrate without having to join a mining pool.
The Future of Self Mining and Business Miners
One way to achieve this, freemining, gives miners the ability to select their own block content. This will dramatically affect the mining industry and possibly bring it back to a decentralized state. If every small and medium sized business around the world had their own miner that is running a freemining fully validating p2p node, they could process and validate their own transactions in their own blocks. It could become a customary piece of office hardware in any office. This would give small and medium sized business the capacity to process their own transactions autonomously and instantly at zero to little costs to anywhere in the world. Business Miners would enable access into global e-commerce markets and increase revenues on per international users. This currently the largest customer base for internet companies represents a lower portion of revenue per user. This enterprise problem could be solved by using micro-transactions processed by business miners. This industry could open revenue streams in developing markets that could completely change supply side logistics, remittance markets, and transfer records given the right integration will glocal mobile payment applications.
Bitcoin mining enables business around the globe to enter the digital market at a very minimal capital costs. This is not only incentivizing them to accumulate Bitcoins but it will also increase adoption among customers and competing merchants. Business will see they can avoid the costs that current payment processors charge per swipe or at a monthly premium. They can bypass the fees and delay in time of international wire transfers. Business to Business miners could send, verify and record anything over the blockchain.
The downside is that these business would have to download and setup full nodes. These core clients require more initial setup, bandwidth, and computational power. There needs to be a way to incentivize setting up these types of core nodes. If you could effectively download a full node and mine from mobile devices there would be more a significant increase in the number of core nodes in the network. Although the difficulty and hash-rate is being driven up by ASICs, the number of reachable nodes with full transaction history is still small at around 7,000. This in essence means that there is a disconnect between the core client and the machines running the majority the network.
One of the ways to fix this problem would be to change the Bitcoin core proof of work algorithm. The tough thing about this is that every change has to be tested in use. This is why a lot of altcoins are considered the test beds for new block release times, proofs of X, and different amounts of coins per block released. No matter what the core change is, the end goal is to build the volume capacity, efficiency, and security of Bitcoin as a global payment protocol. For mining to continue to be decentralized, it is essential to create incentive for people to setup full nodes. Some have even suggested putting full Bitcoin nodes in orbit.
Mining has the robust combination of unstructured simplicity and limitless potential for worldwide adoption. A ton of applications will be built on these types of global decentralized networks over the next couple years. Ultimately, no matter what titled asset is being transferred and recorded in the blockchain, there needs to be incentive for miners to keep hashing.