Bitcoin mining has evolved rapidly overheen the last 7 years, with three distinct generations of miners ter terms of power efficiency:
At the time of writing, the third generation of miners have suffered a wedloop to the boundaries of silicon fabrication technology, with the very first ASICs using 100+ nanometer technology while latest chips have bot developed using more modern 16 nanometer technology.
Spil the value of a bitcoin has enlargened overheen the years, so has the mining competition, resulting te the need for significant up-front capital. Latest estimates have set the required startup capital for an industrial mining operation at $Ten,000,000. That’s overheen 1,000 block prizes (presently 25 BTC) and, of course, operational costs will eat into a miner’s revenue, necessitating an even greater number of blocks to be mined ter order to achieve a positive come back on investment.
This leads to the question: where is the Bitcoin mining industry headed? Will mining proceed to become even more centralized? Or will it sway back te the other direction? Overheen the years mining centralization has bot swinging back and forward like a pendulum, at least spil far spil wij can measure from looking at hashrate distribution across mining pools. It’s less clear how concentrated the pool participants are.
It seems that significant hardware advances cause centralization because fewer people are able to get their mitts on the fresh generation of hardware, but spil the advances become less significant the network decentralizes again because mining becomes more competitive. Wij can see the advances te hardware power from looking at the historic hashrate:
It’s unlikely that ASICs will everzwijn again see the same velocity of improvements ter spectacle and power efficiency that they liked ter the past two years. Spil a result, wij will see industrial-scale miners rival on other factors such spil power, cooling, and even fresh service offerings. I expect that industrial scale mining will proceed to predominate the ecosystem for the next several block prize eras.
The greatest threat to industrial mining overheen the next decade will be the rise of embedded / integrated low powered mining. Full-time embedded mining is unlikely to be directly profitable ter the same way that current industrial mining is profitable. It may take several forms — it could make economic sense if the miner wasgoed gaining extra utility from it, such spil by heating a slagroom or a water waterreservoir. Wij can only guess spil to what such devices may look like, but it’s clear that if you can subsidize an existing necessary operation such spil heating air or water by at the same time earning satoshis, it’s a win.
Such devices may automatically turn on and off not due to mining profitability, but due to other factors such spil ambient temperature. It could also make economic sense for a device to mine satoshis te order to make use of the Internet of Things and machine-payable APIs — the utility of gaining access to fresh economic networks could be worth mining at a slight loss. This seems to be 21’s vision and it aligns with their original optie:
Crucial to this is the idea that bitcoin generated by embedded mining is more convenient — and hence more valuable — than bitcoin bought at market price and by hand moved overheen to the webpagina of utility.
Don’t let the size of the 21 Bitcoin Laptop deceive you – it is merely a prototype. Just spil the initial Bitcoin ASICs embarked off using 100+ nanometer technology and dropped by an order of magnitude, the technology employed by 21 will also shrink. The proliferation of embedded mining will take hold once it transitions from the current proof of concept full-stack “Bitcoin Computer” to System on a Chip vormgeving. It is at this point that it will make economic sense to deploy embedded mining to the Internet of Things, with mining capability added to phones, routers, and perhaps even fridges.
The reason I find embedded mining to be such a powerful concept is that if it catches on wij will be incentivizing the general public to mine at a netwerk loss ter fiat terms. If this sounds illogical, consider the perspective that the miner will essentially be paying for some other sort of utility, but they will be doing so by “spending” electric current. That is, you can sidestep setting up a billing relationship with a fresh service provider and instead just add a slight bump to your electro-stimulation bill – this reduction te friction can be valuable. If a sufficient number of devices are mining a sufficient portion of the global hashrate at a nipt loss, this could waterput for-profit industrial scale miners out of business. To be clear, “a sufficient number” is the big question — it would no doubt require a deployment along the scale of ems of millions of devices. But, if successful, embedded bitcoin mining may “buy” us re-decentralization of mining by subsidizing the cost of mining across the entire user base rather that concentrating it ter industrial miners who vereiste use economies of scale to remain competitive.
It’s no secret that the block prize will eventually druppel to zero. Some time around the year 2044, wij will come in the 10th block prize era and the miner subsidy will druppel below 0.1 BTC. Unless a bitcoin is worth $100,000 te 2015 dollars ($250,000 ter 2044 dollars assuming 3% annual inflation) then we’ll need slew of transaction fees to proceed paying for the same level of security. If Bitcoin survives to the point that transaction fees eclipse the subsidy of freshly minted coins, the market dynamics will switch for miners.
Delving into the psychology of large scale miners exposes that their definition of “rational” may not be the same spil the average user’s. Many miners are treating their operation spil a long term speculative play. From my conversations with miners, most do not instantly convert all of their earnings into fiat — they’ll convert what is necessary to pay for ongoing operating costs, but profits are likely to be saved ter bitcoin. Because they care more about the long-term value of a bitcoin rather than short-term, it can result te miners performing “irrational” altruistic brief term behavior, such spil lending each other hashpower during emergencies, or reserving 50KB of space vanaf block for no-fee transactions that spend “old coins.” This may also mean that miners likely care more about the total number of bitcoins they accrue rather than per-block profits ter terms of fiat. If the exchange rate volatility drops to levels similar to major global currencies such spil the dollar, pound, and yuan, or there aren’t large quantities of bitcoins being minted, they may take their holdings and fade away spil a fresh generation of fee-hungry miners comes in the market. Thesis miners will be even scrappier and will contest for the slimmest of margins – they will also most likely care more about brief term profits rather than the long-term health of the system.
Eventually, miners will only collect transaction fees with no block subsidy, meaning that there may be a lotsbestemming more variance te profitability from hour to hour. If the memory pool gets backed up then wij can expect to see more users paying higher fees to incentivize miners to confirm their transactions. Wij are already watching this ter 2015 spil events such a ample price swings cause a surge of people attempting to come in exchanges te order to trade. This toverfee variance will result te a moving target for a mining profitability threshold. It’s feasible that if wij see a broad distribution of embedded mining chips ter a multitude of devices that matches the vision being pursued by 21, they will automatically activate during periods of profitability when the threshold is crossed. If intermittent mining becomes popular and a significant portion of available hashing power is usually lounging dormant, it could permit the Bitcoin network more “bursting” capability during periods of high request. That is, if 50% of hashing power is usually offline and waiting for a mempool backlog with high toverfee transactions, bringing the dormant hashing power online would halve the time inbetween blocks and thus dual the network throughput.
If 2nd layer off-chain payment networks like Lightning Network take off, they will also likely affect the dynamics of mining. Spil the block subsidy dries up, wij could see large miners switch to running Lightning Network hubs, leveraging the capital they have built overheen the years te order to collect transaction fees on this fresh network with much lower operational costs. It’s also possible that cascading events on the Lightning Network from time to time result ter hordes of users having to lodge on-chain. This could occur if a large hub goes offline or if a knot at the edge of the network receives a loterijlot of value and has nowhere to thrust it, forcing users to druppel out of the Lightning Network te order to make use of the stuck funds. This could conceivably toebijten if, for example, a Bitcoin exchange accepts Lightning Network payments and there is a large sway ter the exchange rate that causes people to “run for the exits” and convert their coins into other assets. Such events may trigger opportunistic intermittent miners to leap online and vy for collecting higher transaction fees.
I’ve only scraped the surface of the possibilities – there are a plethora of other variables that could drastically affect mining dynamics, such spil:
- The price of electro-stimulation. Cheap renewable energy would be a spel changer. Paying for access to networks / APIs with electrical play becomes more appealing when tens unit is practically free.
- The size of blocks and what level of fees are blockchain fees versus off-chain fees.
- The mining algorithm. If an algorithm is developed that everyone agrees is superior to Proof of Work then wij could switch to it.
- Unforseeable flexcap-esque switches to the Bitcoin protocol that enable miners to “pay” for the capability to switch block properties.
The only thing certain about the future of bitcoin mining is that it will not remain the same for long.