Cryptocurrency Essence Series: The Rise and Development of the Mining Industry

Original author: Chris Dannen, Leo Zhang and Martín Beauchamp, have worked iteration capital (Iterative Capital)

Compilation: Katt Gu

Source: Block rhythm

This article is an excerpt from a report written by cryptocurrency management company Iterative Capital, "What is the nature of the cryptocurrency phenomenon?" Iterative Capital is an investment management company focused on mining and operates the North American cryptocurrency OTC trading platform i2 Trading.

Compared with the issuance of tokens, venture capital, or volatility transactions, the mining industry appears less frequently in various types of marketing in the capital market, making it the most predictable cryptocurrency investment activity. The profitability of mining is driven by the marketing of semiconductor cycles, energy costs and the overall performance of the cryptocurrency market. Although mining investment is essentially a long-term investment, as long as miners can optimize management costs and purchase machines at fair market prices, mining investment can be reduced. The decision of a miner to purchase hardware or support a specific network is affected by short-term market trends much less than the characteristics of the network protocol and the technical life cycle of the hardware purchased. The basic factors considered by miners include but are not limited to the following:

Choose a workable network.

Buy hardware from a suitable hardware manufacturer at a reasonable price.

Adjust purchase time based on hardware cycle.

Energy costs and other management costs for hosting facilities.

Security and staffing of hosting facilities.

Liquid reward management.

Local regulations and taxes. There are two main factors driving the dynamics of the mining page market: hash rate growth and price fluctuations. Fundamentally, these two factors are closely related. A higher hash rate enhances the security of the blockchain and makes the network more valuable; in turn, as the price of relevant currencies increases, the demand for mining equipment will also increase, which means that mining hardware suppliers Competition between them will intensify to capture that demand.

Although the spot price of Bitcoin has fallen sharply so far, the hash rate of the Bitcoin network has been growing at an alarming rate. Since January 2018, Bitcoin miners and traders have been living in a completely independent world: miners have continuously reinvested in hardware and facilities, and it is expected that engineering progress at the core protocol level will bring the next round of price increases. Because miners control mobility, this is almost equal to a self-fulfilling prophecy. (The appendix at the end of this article discusses popular concepts about price trends.)

Figure 11: Despite the drop in Bitcoin price, the hash rate continues to grow. (Source:

The mismatch between hash rate growth and price volatility is a result of the hardware market and the capital market being out of sync. Under normal circumstances, the difficulty of mining can be predicted by the wafer shipments of semiconductor manufacturer TSMC (which accounts for 90% of Bitcoin ASIC production). The foundry's delivery cycle (usually three months) is longer than the Bitcoin price cycle, which means that wafers that have been put into production during the Bitcoin price decline will cause excess capacity.

Figure 12: Demand for TSMC wafers may decline due to unsustainable mining profits. (Source: Morgan Stanley Research)

On the other hand, due to the cumulative nature of proof of work, the influx of higher hashes into the network will make the system more secure and reliable. Higher finality means that the system will be more stable when processing transactions, and it is more convenient for third-party developers to develop on the system.

Cryptocurrencies that use proof-of-work are designed to closely link capital markets and distributed networks. As the price of Bitcoin has continued to rise over the past decade, the mining industry has developed into a huge industry. In the first half of 2018, Bitmain, the largest cryptocurrency ASIC maker, reported $ 2.5 billion in revenue and $ 1.1 billion in profits.

Figure 13: Bitcoin miners' income in recent years. (Source: Frost & Sullivan)

The rise of professional hardware

Over the years, cryptocurrency mining tools have evolved from CPUs to GPUs to specialized hardware such as FPGAs (field programmable gate arrays) and ASICs. Due to the competitiveness of the industry, miners are being motivated to buy more efficient hardware, even if it means paying higher up-front costs for these machines. As some hardware manufacturers upgrade to faster and more efficient machines, others are forced to upgrade, and equipment competitions have emerged. Today, for the more well-known networks, mining is mainly performed through ASIC. Bitcoin's sha256d is a relatively simple calculation; the job of Bitcoin ASIC is to calculate trillions of SHA256d hash functions per second, which is impossible for other types of semiconductors.

First introduced in the 1980s, ASICs changed the chip industry. In the cryptocurrency world, ASIC manufacturers (such as Bitmain) design chip structures based on specific hash algorithms for a given network. After several iterations and tests, as part of the so-called "tape-out" process, the layout of the circuit photomask is sent to foundries such as TSMC and Intel. Until the chip returns from the foundry, the actual performance of the chip will not be known. At this point, ASIC manufacturers need to optimize the thermal design and chip alignment of the hash board before the product is ready for production use.

The rise of application-specific hardware is inevitable and an inevitable trend in computing hardware cycles. Similar to the situation in which gold mining and oil drilling technologies continue to evolve as the value of basic commodities continues to increase, as cryptocurrencies become more important, application-specific hardware for cryptocurrencies is rapidly improving. Although short-term price behavior is mainly driven by speculation and has been observed to be uncorrelated with the hash rate, in the long run, these two factors form a benign feedback loop.

Figure 14: The market size of the global blockchain hardware market from 2012 to 2020, divided by revenue and growth rate. (Source: Frost & Sullivan)

Figure 15: The size of China's blockchain hardware market from 2013 to 2020, divided by revenue and growth rate. (Source: Frost & Sullivan)

Past, Present and Future of ASIC Manufacturing

Cryptocurrency miner is a heterogeneous computing system, that is, a system using multiple processors. As Moore's Law slowed down, heterogeneous computing became more common. Gordon Moore, the founder of the law of the same name, predicts that transistor density in semiconductor manufacturing will produce continuous and predictable hardware improvements, but these improvements will only be 10-20 years before the basic physical limit is reached.

The first generation of bitcoin ASICs included Chinese roast cat miners, KNC in Sweden, and Butterfly Labsh and Cointerra in the United States. Application-specific hardware quickly showed their promise. The first Avalon mining machines were launched in February 2013. By May, about a third of the network was supported by their unparalleled computing power.

The key to integrated circuit competition is how fast a company can iterate its products and achieve economies of scale. Without sufficient hardware manufacturing experience, Roasted Cat quickly lost market share due to delays and a series of key technical errors.

Around the same time in 2013, Wu Jihan and Zhan Ke regiment founded Bitmain. In the early days of Bitcoin ASICs, just improving the density of previous-generation chips (ie, technology nodes) provided an immediate and effective upgrade. Obtaining advanced technology nodes from foundries is always expensive, so the challenge is not in superior technology design, but in the ability to raise funds. Shortly after Bitmain was established, the company launched AntminerS1 using TSMC's 55nm chips.

In 2014, the cryptocurrency market entered a long-term bear market, and the price of Bitcoin fell by almost 90%. When the market recovered in 2015, Antminer S5 (Bitmain's latest machine at the time) was the only product still in production. Bitmain quickly established its dominance. Subsequently, engineers from Roasted Cat joined Bitmain and developed S7 and S9. These two machines later became the most successful cryptocurrency ASIC products sold to date.

The semiconductor industry is developing rapidly. Increased competition, production innovation and economies of scale mean that chip prices will continue to fall. For large ASIC mining companies, in order to maintain their profit margins, they must relentlessly seek more design improvements.

Changes in the hardware industry

In the past, producing faster chips required placing transistors closer to the chip substrate. The distance between the transistors is measured in nanometers. As chip designers begin to use cutting-edge technology nodes with transistor distances as low as 10nm or 7nm, the improvement in chip performance may not be proportional to the reduction in distance between transistors. According to reports, as of March 2018, Bitmain has tried to stream new Bitcoin ASIC chips at 16nm, 12nm and 10nm. All of these chips reportedly had problems tapering, causing the company to lose nearly $ 500 million.

After the 2017 bull market, many new original equipment manufacturers (OEMs) are entering the Bitcoin ASIC space. Although Bitmain is still an absolute leader in terms of scale and product sales, the company is significantly behind in the performance of its core products. InnoSilicon, Canaan, Whatsminer, Bitfury and others are quickly catching up, compressing the profits of all players in the market.

As technology node improvements slow down, ASIC performance increasingly depends on the company's architectural design capabilities. Therefore, having an experienced team to implement fully customized chip designs is critical to the future success of ASIC manufacturers. In the long run, the design of ASICs will become more open source and more accessible, enabling commercialization.

Figure 16: Mining hardware and mining difficulty (Source: "The evolution of bitcoin hardware")

Bitcoin mining started as an amateur activity and can be done from a laptop. From the chart above, we can see the accelerated development of industrial mining. Today, industrial mining groups, cloud mining providers, and hardware manufacturers no longer run mining equipment in garages or basements, but instead set up or renovate data centers specifically for cryptocurrency mining. In places with sufficient electricity, such as Sichuan, Inner Mongolia, Quebec, Canada, and Washington State, large facilities with thousands of machines operate around the clock, all year round.

In the brutal mining game, continuous infrastructure upgrades require operators to quickly make deployment decisions. The industrial miners work directly with the miner manufacturer on overclocking, maintenance and replacement. Their facilities for hosting miners are optimized to run the machines at full capacity with the maximum possible uptime. At the same time, large miners have signed long-term contracts with some power plants to obtain cheap electricity. This is a win-win situation; miners can get a lot of electricity with electricity prices close to zero, and power plants can obtain a stable demand for grid power.

Over time, the cryptocurrency network will continue to look for cheap and underutilized energy sources, like evolving organisms, and increase the utility of remote facilities that exist outside existing industrial centers. Cryptocurrencies using proof of work rely on adding new blocks to the blockchain to maintain consensus. .

Over the years, many people have expressed concern about the large amount of energy consumed during the production of Bitcoin. Satoshi Nakamoto himself answered this question in 2010, saying:

"This is the same situation as gold and gold mining. The marginal cost of gold mining is often close to the price of gold. Mining gold is a waste, but this waste is far less effective than using gold as a medium of exchange. I think bit The situation is the same with Bitcoin. The utility of transactions realized by Bitcoin greatly exceeds the cost of electricity. Therefore, no Bitcoin will be a net waste. "

"Subtle terror balance" during the miner's reign

In unlicensed cryptocurrency systems such as Bitcoin, large miners are also potential attackers. Their cooperation with the network is premised on profitability; if the attack becomes profitable, the big miners are likely to try it. Those who follow the development of bitcoin in recent years know that the topic of miners' monopoly is controversial.

Some participants believe that ASICs can disrupt the health of the network in various ways. When the hash rate is concentrated, the community is afraid that the miners will join forces to launch a so-called 51% attack, that is, the miners who account for the majority of the hash rate can use this computing power to rewrite transactions and get the same funds to spend Times. This type of attack is common in smaller networks because it is less expensive to implement a hash rate of 51% in these networks.

Any mining pool (or mining pool alliance) with more than 51% hash rate has a "nuclear weapon" in the network. This is actually using the hash rate to hold the community hostage. This scenario is reminiscent of the Cold War-era nuclear strategist Albert Wohlsetter's view on the delicate balance of terror:

"Balancing does not happen automatically. First, because thermonuclear weapons provide a huge advantage to aggressors, great wisdom and realism are required to design a stable balance at any given level of nuclear technology. Second, The technology itself is changing at an alarming rate. Deterrence requires urgent and ongoing effort. "

Although large miners can theoretically launch an attack and reverse the consensus history to their advantage, they may also push the market to a disadvantageous position for them, causing the price of tokens to plummet. Such a plunge in prices would make miners' hardware investments and currencies that they have earned in the past long-term holdings worthless. With highly concentrated manufacturing, a secret 51% attack is easier to implement.

Figure 17: Miner concentration in the mining pool (Source:

In the past few years, bitmain has dominated the market in the form of hashrate concentration and manufacturing concentration. At the time of writing, analysts at Sanford C. Bernstein & Co. estimate that Bitmain controls 85% of the cryptocurrency mining chip market.

"Unstructured tyranny" under core developers

Although malicious miners pose a constant threat to non-permitted cryptocurrency systems, the dominance of core software developers may equally be detrimental to the integrity of the system. In a network controlled by a small number of elite technicians, miners and full-node operators running the code may not be able to easily detect false changes to the code.

The community has taken various approaches to combat the huge impact of miners. Siacoin's team decided to produce their own Asic miner after learning about Bitmain's Sia miner. Communities such as Zcash are cautiously welcoming to ASICs. New projects such as GRIN have designed their hashing algorithms to be RAM (random access memory) intensive, thereby increasing the cost of manufacturing ASICs. Some projects like Monero have taken a tougher step and changed their hashing algorithm just to make a manufacturer's ASIC machine inoperable. The fundamental difference here is not "decentralization", but which faction controls the way the market values ​​the generation of coinbase rewards; this is a struggle for control over the "golden goose".

Due to the highly dynamic nature of the decentralized network, prompt action on the concentration of power around miners can lead to the opposite extreme: concentration of power around head developers. The concentration of these two kinds of rights is very dangerous. The latter extreme can lead to unstructured tyranny, that is, without the wrong premise of a formal hierarchy of power, the community worships the main submitter in a personal worship. The word comes from the social theorist JoFreeman, who wrote in 1972:

"As long as the structure of the group is informal, the rules of how to make decisions are only known to a few people, and the knowledge of power is limited to those who know the rules. Those who do not know the rules and have not been selected as enlightened , You have to stay confused or fall into paranoid delusions that something they do n’t know is happening. "

The lack of a formal structure can be an invisible obstacle for new contributors. In the context of cryptocurrencies, this means that despite the motivation to bring more development talent to the team (thus speeding up project development and increasing the value of the network), the open distribution governance system we discussed in the previous section is still May go wrong.

The dominance of a miner or developer may lead to changes in the development roadmap, which may damage the entire system. One example is the wrong decisions made by the "big block parties." Due to the willingness of some miners to support larger block capacity, the Bitcoin network was split into two on August 1, 2017, resulting in increased costs for full node operators. For blockchains that use proof of work, these operators play a vital role in enforcing their rules. Higher costs may mean a reduction in the number of full-node operators on the network, which in turn makes it easier for miners to disrupt the power balance for their own benefit.

Another example of an imbalance is the Ethereum Foundation. Although Ethereum has a strong community of DAPP (distributed application) developers, the core protocol is only determined by a small number of project leaders. In preparation for the Constantinople hard fork of Ethereum, the developers decided to reduce the mining reward by 33% without asking the miners for their opinions. Over time, alienating the miners' unions has caused the network to lose the support of a major stakeholder group (the miners themselves) and created new motivations for miners to attack the network for profit or revenge.

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