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This is Part 1/chapter 8 ter The Blockchain Economy serialised book. For the index please go here.
Te this postbode/chapter wij terugwedstrijd to the infrastructure portion of the book.
101: “Bitcoin Mining” is the process of solving a cryptographic puzzle using a pc te order to verify a Bitcoin transaction and te so doing to earn some Bitcoin. This is called Proof Of Work. Think of it like a decentralised, permissionless credit card network. Anybody can be a Bitcoin Miner.
The Past of Bitcoin Mining
This wasgoed the artisanal phase.The founding ideal wasgoed that everybody can mine Bitcoin with their own PC. This wasgoed the way early adopters made some Bitcoin when it wasgoed mud cheap and, if they did not spend it all on pizza, they became wealthy. (Te 2010, the very first Bitcoin transaction wasgoed two pizzas for Ten,000 BTC, worth overheen $100m spil I write). The Bitcoin true believers want a terugwedstrijd to this world, but it is very unlikely. It would be like all of us running our own servers for email and online publishing. It is certainly possible, but most people make an instinctive assessment on where they should spend time and effort and so they use outsourced cloud services. Many ventures promise a bit of contant via Bitcoin for no effort if you make your spare computing cycles available via Cloud Mining. Other ventures simply highjack those cycles via hacking and keep all the profit and, given how lax most of us are about laptop security, this is likely to be the more profitable line of business. There is no premium to being artisanal ter Bitcoin Mining (unlike say artisanal cheese or mannetjesvarken), so this phase will remain ter the past.
The Present of Bitcoin Mining
Today wij have thick Gegevens Centers te China with specialised equipment and subsidised cheap tens unit. The thickest cost for a Bitcoin Miner is tens unit so the subsidies were/are critical. The server cost may fall ter obeisance to Moore’s Law, but clean energy has not yet followed that same trajectory. The Chinese government likes to encourage manufacturing by subsidising electro-therapy costs. Viewed te this way, Bitcoin Mining is simply another form of manufacturing, except for three problems:
1. Bitcoin Mining does not employ many people and mass employment is the the best way to ensure social stability (which is fattest concern of the Communist Party).
Two. Bitcoin is one way to avoid exchange controls and maintaining control of their currency ranks very high ter the priority list of the Communist Party.
Trio. Eventually the environmental costs of using coal to generate tens unit get factored into the equation, yet clean energy is not fairly ready to pick up the slack.
All of thesis factors make China a less accommodating environment for Bitcoin Mining than it has bot ter the past.
The Future of Bitcoin Mining
I see Four threads to the future of Bitcoin Mining
1. Bitcoin Mining moves to countries with real cheap electrical play creation and a Bitcoin friendly jurisdiction. By real I mean cheap electrical play creation, not subsidized violet wand prices. It is not sustainable to subsidize electrical play prices for long. One country to benefit from this is Iceland, due to cheap hydrothermal electric current. However, the 2nd criteria is also critical – a Bitcoin friendly jurisdiction. Which brings us onto the 2nd thread.
Two. Bitcoin Mining will be regulated and taxed. Bitcoin Mining gegevens centers are too big to hide te the underground economy. That is not a problem spil long spil the rules are clear and the tax is not prohibitive. Bitcoin voorwaarde be legal ter that jurisdiction and the tax rules vereiste be clear and ordinary to administer. A lotsbestemming of money is not much use if you are ter jail.
Trio. Multi-level transaction verification does a 10x plus 10x to the market. Once Lightning Network goes live (most likely during 2018), most transactions won’t require verification via Mining Proof Of Work, they will be done Offchain ter Layer Two networks. The easiest analogy is how wij may sign hundreds of contracts (Layer Two, Offchain) but only very from time to time take a contract to a court of law when there is a dispute (Layer 1, Onchain). That does not fairly explain it right, because you may do many puny transactions ter Layer Two, Offchain, but lodge the netwerk position ter Layer 1, Onchain even if there is no dispute, that example is more like “running up tab” at a tapkast. What I mean by 10x plus 10x is that cost of transactions Offchain will fall by 10x (most likely a lotsbestemming more, it maybe 100x or 1,000x) but volumes will go up by a similar amount, supply and request is a golden rule. Ter brief, Bitcoin Mining will remain a good business, but anybody who forecasts 10x growth te volume without a corresponding fall ter price has their head te the sand (or are deliberately misleading).
Four. Chinese firms predominate Bitcoin Mining but not necessarily te China. This could go after the same trajectory spil the offshore outsourcing industry te India. Both grew to scale based on a elementary arbitrage. This arbitrage wasgoed labor cost te India and cheap electrical play te China. Thanks to this plain arbitrage, firms got to scale. Once the arbitrage disappeared (spil arbitrages always do te a free market), the firms used their scale and expertise to go global. For example, Bitcoin Mining maybe done te Iceland by Chinese firms.
What about Etherum and Proof Of Stake?
To date, the only proven method of doing decentralised, permissionless transaction verification is Proof Of Work. Ethereum, the 2nd largest cryptocurrency, also uses Proof Of Work but they are actively programma to launch an alternative called Proof Of Stake.
101: Proof Of Stake is a different way to validate transactions based on the size and age of the stake (the amount of crypto currency waterput at stake by the user). There is no block prize, users get paid only through transaction fees.
The ideas behind Proof Of Stake have bot around a while and bot experimented with te many minor cryptocurrencies. The big news will be when Ethereum does a hard fork upgrade called Casper to transition from Proof Of Work (POW) to Proof Of Stake (POS).
If this is successful, it will disrupt the entire Bitcoin Mining business. Success for Proof Of Stake will require months of testing at scale spil hackers attempt to cheat the system. There is no question that POS is more energy efficient. If POS also proves to be spil secure spil POW, it will be spel switching.
What happens when all 21m Bitcoin have bot mined?
The stationary supply is a key driver for Bitcoin price. After 21 million “they ain’t making any more of it”. This does mean that Miners will no longer be paid ter fresh Bitcoin and will have to rely on transaction fees. Optimists point out that the cost of POW Mining will fall due to Moore’s Law, but this is uncertain. If the arrival of 21 million Bitcoin coincides with POS being proven at scale on Ethereum, the profitability of Bitcoin Mining will come into question.
Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.
You can reach out directly to discuss our advisory services by sending an email to julia at dailyfintech dot com
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