Tag Archives: cryptocurrency mining

Bitcoin Cross the Chasm: Libra pushes it over

After 10 years of existence, and having increased in price by a factor of a million or so even while supply increased by a factor of seven, Bitcoin has crossed the chasm. Ironically, Facebook supplied the final push when they announced their Libra plans on June 18th.

Bitcoin’s high value is founded on two very strong attributes: security and scarcity. In addition it is highly divisible, fungible, and easily and rapidly transportable across the world. But there are thousands of cryptocurrencies that have those latter attributes. Yet they each have a small fraction of Bitcoin’s value. In fact about 2/3 of the value of all cryptocurrencies combined ($300 billion, approximately) is found in Bitcoin alone, at roughly $200 billion.

How can the price increase in a decade by a factor of a million even as supply went up? Because hashing rate, that drives up security, has increased even more, around a factor of a trillion. This made Bitcoin much more desirable to hold as a store of value. 

The growth in hashing power for the Bitcoin blockchain, logarithmic scale (Chart from blockchain.com)

Security

Security comes from hashing power applied to the mining process. Cryptocurrency mining via Proof of Work is the most effective consensus algorithm to maximize security for a decentralized accounting ledger. This computational hashing power is in the form of specialized ASIC hardware specifically designed for rapidly calculating the Proof of Work algorithm.

Bitcoin has steadily grown to an enormous 70 Exahashes of hashing power deployed around the world. That is 70 million trillion hashes per second. The hash rate has grown by a factor of 1000 in the past five years, with more mining pool nodes and better hardware. 

The coin with the second position in hash rate, Bitcoin Cash, a clone or hard fork of the original Bitcoin, has only 3% as much hash rate.

There is that much computing power directed toward solving the cryptographic puzzle, and with the winner claiming the current block reward of 12.5 Bitcoins each 10 minutes or so. Some $19 million is mined per day, at the current price of $10,750 thus it is worth throwing lots of compute power into the solution.

Security can be measured by how much it costs to mount a 51% attack on Bitcoin.  It costs around $1 million to rent enough compute power for an hour of mining; this would allow a counterfeiter to double spend, but the value of double spent coins would be less than the rental expense.

A 51% attack would not invalidate ledger entries that contain your Bitcoin received yesterday or five years ago, just as a new counterfeit dollar does not replace your existing one. The clever design of the Bitcoin blockchain means that each ten minute block added after a particular block increases the security of that particular block exponentially.

The more hash rate, the more security.

While some have criticized Bitcoin’s electricity consumption, roughly equivalent to Ireland’s needs, the conversion of electricity to secure information is at the heart of what provides Bitcoin value. The electricity is not wasted, energy is encapsulated as value; electrons are turned into secure bits. The electricity used in Bitcoin mining should be compared to the much greater use of electricity and energy in gold mining, for example, or in the offices and computational facilities of the banking system.

Furthermore, 74% of Bitcoin’s electricity is from renewable supply, especially  hydropower. 

Scarcity

The world has never seen a form of money with scarcity as great as that of Bitcoin. To be money, one requires divisibility for a standard unit of account, and stability in the supply.

Gold coins and silver coins have been used in the past because of the relative scarcity of these precious metals, formed only in supernovae. Gold, unlike silver, does not increase in quantity much each year since most gold ever mined is still around in the form of jewelry or bars or coins. The supply rate increase is around 1.6% per year. Historically, large new discoveries made a difference, but those days seem to be behind us. Asteroid mining of gold is decades into the future.

The yearly increase in supply depends on how the price for gold moves, mining discoveries and development, and the cost of energy and other inputs to the mining process. But the supply increase is rather stable. There are total above-ground stocks of around $8 trillion. One-quarter of that, some $2 trillion, is held by central banks around the world.

Governments have moved away from the gold standard during the last century, and all government issued money is now fiat fractional reserve currency, issued as debt. The supply is influenced by (and sometimes more directly controlled by) committees at the central bank through monetary policy. The increase in supply of dollars currently runs at over 4% per annum. Consumer price inflation is lower, around 2%, due to productivity increases in the economy.

Bitcoin new supply each day and each year is not determined by committees of Ph.D. economists and bankers, as in the case of fiat, nor influenced by its price, as in the case of gold! If the amount of hashing power drops in response to a price drop, the Bitcoin mining difficulty that is embedded in the algorithm automatically decreases and there is still one new block issued every 10 minutes on average, containing the equivalent of 12.5 shiny new Bitcoins.

Bitcoin’s supply increase is all baked into the Nakamoto consensus: there will be at most 21 million Bitcoin ever issued, and that final number is not reached for another 120 years. However, current supply is already at 17.8 million Bitcoins, so there are only 3.2 million more that will ever be created.

The limited supply does not restrict Bitcoin’s use as a medium of exchange since each Bitcoin can be subdivided into 100 million units of Satoshis (sats). Thus even if Bitcoin reached $1 million in price, each sat would be worth just a penny.

Approximately every 4 years the supply issuance rate is cut in half by means of cutting the block reward in half. These quadrennial events are called Halvings (or ‘Halvenings’). That means inflation decreases continually as (a) the stock grows, and (b) the rate of new coin issuance decreases. At the next Halving the block reward (block subsidy, formally) will decrease to 6.25 Bitcoins from the current 12.5 reward. At the Halving after that it will decrease to 3.125 Bitcoins per block.

While in its early years the supply increase rate was quite high for Bitcoin, now it is at a reasonable 3.8%, less than the US dollar supply increase of over 4%. And at the next Halving in May 2020 it will be cut to 1.8%. (The rate drops more than by half since the existing stock is growing every 10 minutes as well). By 2024, the inflation rate will drop under 1% and it will continually decrease inexorably toward zero.

Bitcoin supply gets tighter and tighter, unlike fiat currencies with continued variable inflation and the risk of inflation getting out of control.

PlanB has built a very nice model of Bitcoin price vs. scarcity, using stock-to-flow ratios, which represent the inverse of the annual percentage supply (flow). Existing stock refers to the total number of Bitcoin ever mined. Flow is the new supply rate. Thus stock-to-flow is the number of years’ of supply, at current rates, that would be required to double the outstanding stock. 

Bitcoin will never, ever, double its outstanding stock, because stock-to-flow keeps tightening in the hard-coded Bitcoin supply algorithm. In the PlanB model, price correlates very well, at 95%, with a high power of the stock-to-flow variable, roughly the cube of that ratio. Bitcoin’s stock-to-flow will double, and be close to gold’s as of next year.  And since market cap (value of all Bitcoin) has correlated with such a steep power law, this is a big deal.

Double feedback loop

The beauty of Bitcoin’s design is that security and scarcity work together in a self-reinforcing pair of cooperating feedback loops as shown in the figure below. 

In the upper loop, we are indicating that Bitcoin is already scarcer each year relative to increasing dollar supply, and as of next year’s Halving, it will be continually scarcer relative to all fiat currencies and match gold as well. This increased scarcity drives price higher. 

In the lower loop, we are indicating that higher prices encourage more mining power, more hashing power, and that increases security. Increased security drives prices higher. 

And thus scarcity increases security. And increases in both work to increase the price. 

The long term outlook is excellent. Volatility is high at present due to a relatively thin market compared to gold, currencies, and Facebook or Apple stock. It will decrease with time as more value is captured into Bitcoin.

Both scarcity and security work in concert to drive Bitcoin price upwards. Copyright 2019, MoneyorDebt

Asset or debt?

All fiat currencies represent debt. Fiat currencies are issued in exchange for debt of individuals, corporations, or governments.

Facebook’s Libra is a debt-based token. It is a so-called stable coin backed by a basket of fiat currencies, which themselves represent debt. Money Creation 101: a bank makes a loan and new money is created; a central bank buys a treasury bill and new money can be created. There is no limit to the amount that can be created (apart from likely regulatory restrictions); it will be created and destroyed relative to demand.

Libra has a model of centralized security, managed by an Association of some 28 companies, and it has no scarcity other than that of the reserve basket of fiat currencies that back it. Libra cannot increase in value, rather its value inflates away along with the Dollar, Euro, Yen, and Pound components of the basket. Bitcoin is an asset, a pure asset with no associated debt. Like gold it comes into existence by a mining process, but mining occurs on computers rather than from the ground. If there is a debt crisis or banking crisis, Bitcoin is not affected, in fact, it would be sought after. Bitcoin was created by Satoshi Nakamoto in 2008/2009 in large part as a response to the debt crisis that brought on the Great Recession a decade ago.

Store of value or medium of exchange?

Money must be a store of value, a medium of exchange, and a unit of account. The default unit of account around the world is the US dollar, but the other main currencies such as the Euro, Pound, Yen, and Yuan are major units of account.

All of the over 100 fractional reserve currencies score highly in the medium of exchange category, at least within their own borders. They do not store value for the long term, losing half their value every decade or two or three depending on the strength of the particular currency and varying inflation rate.

Bitcoin is designed, like gold, first and foremost as a store of value, with its very constrained monetary supply. Its monetary policy is even superior to that of gold, and completely defined in advance.

No other money has ever had its monetary policy for the next hundred and even thousand years laid out in advance. Gold was the closest, but new mine discoveries always added major supply increases.

Bitcoin has been criticized on the medium of exchange front, but it is improving in that regard as well. First, remember that it is subdivided into a hundred million sats, so small quantities are not a problem. Fees are sometimes high, but trivial if you are moving large amounts, and much less expensive than the costs of bank wires or moving gold. Transfers are much more rapid, occurring within an hour for sufficiently secure confirmation.

The Lightning network and other second layer solutions such as wrapped Bitcoin (ironically using Ethereum ERC20 tokens) are making Bitcoin more accessible for small purchases by allowing transactions to be handled off-chain and later settled in bulk back to the Bitcoin blockchain. 

Government reaction to Libra

Theannouncement of Libra by Facebook and the group of companies known as the Association in mid-June has thrown governments into a tizzy. In the US, the Federal Reserve chair, the SEC chair, the Treasury Secretary and even the President all weighed in with their opinions. The net-net of comments were that Libra needs to be closely regulated, certainly with respect to KYC/AML (know your customer and anti-money laundering), and President Trump, presumably at Secretary Mnunchin’s urging, said they ought to be required to obtain a banking license. Secretary Mnunchin expressed the usual money laundering concerns.

Hearings before Congress were quickly scheduled and took place in the Senate and House mid-July. David Marcus, who leads Libra development at Facebook’s Calibra subsidiary, testified. He was not especially forthcoming on whether Facebook will be able to restrict some users from access to the Calibra wallet, and had limited information about the Association. The other members of the Association have only signed letters of intent; the charter is not yet ratified.

Congressperson Waters, who chairs the House Financial Services committee, has called for a pause in development until reviews can be completed. Marcus declined to commit to this, or to a preliminary sandbox environment working in conjunction with regulators. A bill has been introduced in Congress that would outright ban Libra, but this seems unlikely to pass.

The IMF, European Central Bank, and other central banks are almost panicking at the prospect of a competitive global currency. The UK Parliament will schedule hearings. The French Finance minister said Libra must not be allowed. India is foolishly trying to outlaw cryptocurrency completely. The Chinese central bank has announced they will develop their own central bank digital currency; they also just published a guide to Bitcoin.

Now what is interesting is that in the US, the Administration, the Fed, and Congress are beginning to draw a clear distinction between Libra, which is corporate money, and one might argue a shadow banking system, and Bitcoin, which is private money, with no centralized control.

It is encouraging for Bitcoin that some Congresspeople get the difference. In fact Congressman Patrick McHenry stated “I think there’s no capacity to kill bitcoin. Even the Chinese with their firewall and their extreme intervention in the society could not kill bitcoin.”

Regulation is already generally in place in the US for Bitcoin and cryptocurrencies more broadly. The SEC is restricting and regulating new cryptocurrency token offerings ICOs and are looking at Bitcoin ETF proposals. The SEC have stated that Ethereum and Bitcoin are not under the purview of ICOs, essentially recognizing the private money nature of the way they were created. (Ethereum is more problematic since they wish to move to Proof of Stake in the future). The CFTC has approved futures trading in Bitcoin. The IRS has been treating cryptocurrencies as assets taxable for capital gains purposes.

So there is no prospect for banning Bitcoin in the US and probably not in most Western countries or Japan and Korea. A Chinese court upheld property rights for holding Bitcoin in July. Although some mining restrictions have been placed in China, this seems more about managing electricity usage and even theft rather than an outright ban on cryptocurrency mining. Iran has recently legalized cryptocurrency mining.

In sum, the reactions of the US government and other governments toward the Libra announcement indicate a desire to closely regulate this corporate money style of ‘cryptocurrency’. This is especially the case since Libra is from a large social media company already under fire for data privacy breaches and whose scale of billions of potential Libra users could pose a systemic threat to central banks’ management of their national currencies.

As Libra is slowed down by regulations in various nations, Bitcoin is unimpeded. As governments recognize the difference between a corporate money (with Libra being a product an association of corporations) and Bitcoin’s private money nature, Bitcoin benefits.

One can argue that all of the attention given to Libra with the announcement and to cryptocurrency more broadly, along with the realization that Bitcoin cannot be stopped,has provided a push of Bitcoin across the Chasm, with Libra’s help even though Libra itself is is not scheduled for release until 2020. 

Bitcoin on a log scale, starting late 2013. (source: Coindesk)

Chasm is crossed by Bitcoin: 20 reasons

1. Bitcoin has been around for 10 years, since early 2009, and has increased in price by six orders of magnitude since April 2010, even as supply increased seven times.

2. Bitcoin has been through two Halvings; the next is only 10 months from now; this is the fundamental driver of scarcity with fully predictable inflation headed under 2% and then under 1% . Supply is now tight and only getting much tighter.

3. Bitcoin suffered through the crypto winter of 2018 and bounced back by a factor of over three times in price since the start of 2019. It has moved back above $10,000 with prospects for $50,000 plus within the next year or so due to the forthcoming Halving (PlanB model of stock-to-flow projection yields the future price estimate).

4. Bitcoin has an enormous lead in security over all other cryptos with far and away the greatest amount of hashing via specialized ASIC accelerated computers.

5. There are some 32 million Bitcoin wallets held by perhaps 10 million people; while it now has significant presence, there is also huge room for growth.

6. Facebook’s Libra has put the Fed, Congress, Treasury Department, SEC into a tizzy. Also the IMF, ECB, Bank of China  and other central banks are more or less panicking around the challenge of global digital currency alternatives. The IMF is creating a series of papers to look at alternatives that could include holding e-money ‘stablecoin’ currency reserves at the central bank.

7. The attention on Libra seems to be leading to a view from Congress and the Administration that (a) we must regulate Libra closely, Facebook cannot be trusted and  (b) Bitcoin is here to stay. 

8. Bitcoin is already the clear global digital currency alternative from a Store of Value perspective and could challenge gold in that regard. Gold has a total market capitalization of $8 trillion of which $2 trillion is held by central banks. Bitcoin is still much smaller at 1/5 of a $Trillion.

9. In the US Bitcoin regulation is mostly in place, with taxation and KYC /AML for exchanges sorted out, a futures market established, and the next big step is retail investment products such as ETFs to ease mass adoption.

10. While volatility of Bitcoin price is high (7% per month) it is decreasing and expected to continue to do so as the market deepens.

11. Bitcoin is an asset, fiat is debt. That alone should drive adoption especially with the next recession and future debt and banking crises. Negative interest rates may be coming to the US, certainly a return to very low rates is on the horizon.

12. Central banks are looking at implementing digital currencies that they would control, but that offers minimal innovation; such a central bank digital currency would still be just the same old fractional reserve fiat, inheriting problems of instability and remaining as a poor long term store of value.

 13. Central Banks cannot resist the cryptocurrency /e-money tide. This leaves them three major alternatives: (a) accept corporate money such as Libra, even holding reserves for them, and squeezing banks as a result (b) outlaw or restrain corporate money and build their own digital currency which could mean individuals hold balances at central banks, also squeezing banks, or (c) strengthen their currencies by adding Bitcoin to their balance sheets along with their gold. They could allow banks to issue their own digital money in competition with Libra and other corporate money, and let the market sort it out with appropriate but not heavy-handed regulation and risk supervision.

14. I do not expect the US,  Japanese, European, or British central banks to add Bitcoin to their reserves any time soon. But some smaller central bank may very well, and start a Bitcoin reserve race. The central bank of central banks, the BIS, will try to slow them down by saying they cannot include any Bitcoin held as part of their reserve accounting position. But central banks might well hold anyway if they believe it will appreciate relative to gold.

15. The first Central bank to actually add Bitcoin to reserves gets a jump on all the others, and could set off a race. Bulgaria may be de facto the first, since their government has seized Bitcoin used in criminal activities that has a present value of $2 billion. This is about equal to the nation’s gold reserves. If they are smart they will not auction it off.

16. Great macro investors like Ray Dalio and Raoul Pal see a next recession coming and continued overhang of debt pushing the US toward zero and negative interest rates. More debt monetization is on the horizon in their view, and in such low interest rate environments with money printing, pure assets like gold and Bitcoin benefit from a flight to safety. With negative interest rates and even small inflation, cash is trash.

17. Libra is a gateway drug to Bitcoin, and exchanges will make a market. As new people get  introduced to crypto through Libra, they will become more aware of Bitcoin and could choose to exchange Libra for Bitcoin as a savings vehicle, while using Libra and competitors for spending purposes.

18. Fiat and Libra and e-money are payment methods, spending vehicles, primarily mediums of exchange. Bitcoin is a savings vehicle, primarily a store of value that can presumably be used for greater purchasing power in fiat or Libra terms in the future due to its stronger monetary policy. Lightning Network and other second layer solutions are enhancing the utility of Bitcoin for purchasing as well.

19. Libra has sharpened the differences in the crypto space. Bitcoin has crossed the chasm because governments in the West are now understanding the clear distinction between corporate money ‘crypto’ and the original decentralized Bitcoin. They have largely worked out their overall approach to Bitcoin regulation while struggling with what to do about Libra and other ‘stablecoins’ or corporate money. Their fear of Bitcoin has lessened as tools to track its usage in money laundering and transnational crime have been developed.

20. After a decade of phenomenal growth, and in time for the 2020s, Bitcoin is coming of age. Expect a growth spurt and many more developments.

“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force” – Patrick McHenry, U.S. Congressman

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Libra: Corporate Money in furtherance of surveillance capitalism

This blog is the first of a two-part series capturing my thoughts on Libra, Facebook’s cryptocurrency announced in mid-June. My thanks to Shahin Khan for his comments and suggestions.

Libra is a clever name. It implies harmony, peace and balance. Librae was also an ancient Roman unit of weight and was used in Middle English to refer to a pound. As we know the English monetary pound started out as a pound of silver. It’s symbol continues to be a special form of the letter L. So there is a deep historical monetary reference.

Libra aims to be the coin that takes cryptocurrency mainstream. Starting in 2020.

Government Money, Private Money, Corporate Money

The idea of a fully digital or electricity-based money goes back several decades. The introduction of Bitcoin in 2008/09 was both a result of technological advancements that provided the foundation for a secure cryptocurrency and a reaction to the failures of the banking system and fiat currency that produced the Great Recession.

Bitcoin fits in the category of Private Money. No government issues it; no corporation is behind it. It is created on ‘mining’ computers in accordance with the Nakamoto consensus and its monetary policy, with a Proof of Work cryptographic algorithm; anyone can mine it. It as if you dug up gold and refined it and fashioned into a bar and stamped the weight and fineness. In this case the Nakamoto consensus inserts the new money into the decentralized open ledger for Bitcoin at the public address of the miner and under the control of the private key of the miner. The miner can sell (transfer to another public address) the Bitcoin for fiat on an exchange and use that fiat to pay the electricity bill and other costs.

Libra, introduced by Facebook and 27 Association partners in mid-June 2019 is, make no mistake, Corporate Money. It is created by an association of corporations in a partnership expected to grow to perhaps 100 members over time. Each member of the association has to stake $10 million to join and must fulfill other requirements related to size and reputation. (Certain non-profits can join under less stringent guidelines).

Is it a blockchain? 

These Association members are then able to act as validators of transactions into the open quasi-decentralized ledger of Libra. This is a permissioned ledger maintained by the Association members who take turns serving as the lead validator, each with the larger of 1 vote or 1% of votes.

A key part of the security of Bitcoin is based in chaining of transaction blocks. The chain is created by hashing the previous block and inserting that hash into the current block, and doing this repetitively.

In the Libra model, the block and the chain are virtual. Libra blocks are batches of transactions as proposed by the lead validator. A 2/3 quorum among validators is required to approve the block of transactions. Establishing that quorum relies on a chain, but there is no direct relationship between the ‘block’ and the ‘chain’ for these.

Referring to it as the Libra Blockchain, as the white papers do, is a marketing stretch at best. Each new transaction creates a new ledger state that is stored as a Merkle tree and validated. There are no blocks in the ledger, much less a blockchain. Facebook wants to use the term to help ease the regulatory burden perhaps, and because of general market awareness.

The consensus used by validators is a voting mechanism that requires a 2/3 majority and is a type of Byzantine Fault Tolerance. The consensus can be thought of as a hybrid with Proof of Stake since Association members must put up considerable capital. And in fact, the Libra white paper states the intent is to move to a Proof of Stake algorithm over time. This remains a tricky problem; Ethereum has been delaying a move to Proof of Stake for years.

Smart Libra

My Mom was a Libra, she was smart. This Libra also intends to be smart, and to support a range of applications. Libra has its own language, called Move, for smart contracts, including the core token creation, accounting, and payments functions. This is a stack-based language with restricted functionality and with a source level compiler, intermediate representation and a run-time environment in a virtual machine to execute bytecode. Initially the intermediate representation, bytecode specification, and VM are available as open source; the compiler is under development.

Move is designed to be safer than say, Solidity, the default smart contract language for Ethereum, which has suffered a number of hacks. Being better than Solidity is not a high bar.

Less flexibility and not being Turing-complete can prevent ambiguity and are thus desirable attributes for smart contracts moving money around. Initially only a predefined set of essential contracts are available, but the intent is to open things up to the developer community over time.

Move will be the development environment for smart contracts implementing a wide range of e-commerce offerings accessed from the Facebook portfolio. The Libra Association will proceed carefully to maintain security. 

Composition of the SDR before the Chinese Yuan was added

SDR-Lite

But enough of the gory technical details. What is Libra in currency terms and what is it good for? In currency terms it is a basket of strong currencies such as the US dollar ($) and the Euro (€), created with 100% reserve backing in the form of short-term securities (bills) and cash deposited in bank or brokerage accounts. It appears that the initial currencies in the basket will also include the UK £ and the Japanese ¥.

The Libra money supply is dynamic. Libra will be created or destroyed (burned) in response to demand. Thus, unlike Bitcoin, its monetary policy is derived from the mix of currencies in the basket.

So it is a stable coin, but unlike other stable coins, it is tied to a currency basket. It looks rather like the Special Drawing Rights (SDR) administered by the International Monetary Fund, but without the Chinese Yuan. Facebook is not allowed to operate in China for censorship reasons, so the Yuan, which is also subject to strict capital controls, is left out of the basket.

Think of it like a money market fund, but the dividends from holding short-term government paper do not go to holders of Libra. They accrue to a separate currency called the Libra Investment Token that is only held by Association members who have staked the $10 million entry fee.

As Corporate money, it is important that it be audited to ensure full reserves are held as backing, otherwise the value could drop below the nominal currency basket value. It may trade at a slight discount or premium in any case.

There are risks with pegging to a basket of fiat money and accepting fiat money that is not in the basket. For example, suppose a banking liquidity crisis, or a crisis of confidence arises, in Italy (as an example), and fears arise that Italy might withdraw from the Euro.  If the Libra Association is holding Euro in Italian banks, seeking higher yields than in Germany, then in this instance they could lose the peg, slip below the nominal value, due to concerns of bank insolvency.

What Could Have Been

The promise of cryptocurrencies includes decentralization, trustless security, immutability, open source access, permission-less participation, autonomous smart contracts, pseudonymity, a tamper-proof monetary policy, and an easy-to-use development environment. 

Achieving such a mix of attributes is difficult. When it has been approached, it has resulted in slow transaction rates and volatility, making the currency unsuitable for high volume transactions or for every-day use.  To address this, the industry has responded by (a) compromising on the ideals of cryptocurrency, accepting less-rigorous variations of the above attributes in order to achieve higher transaction rates, and (b) creating stablecoins tied to fiat currency to address volatility. 

Facebook’s commanding global digital presence can drive adoption and take the cryptocurrency concept to the mainstream. However, Libra compromises on too many attributes of the ideal cryptocurrency to be categorized as anything but a walled-garden Corporate money, and barely a “crypto” currency at that.

Imagine if instead of creating this Corporate money Facebook had:

  1. Created a currency (call it Solar) that association members could mine on supercomputers via Proof of Work, but also any Facebook user could mine on their laptop or phone, and
  2. Established a system that would pay license fees in Solar for data placed into the Facebook platforms, and
  3. Implemented a true blockchain that would secure the ownership of the data for the originators.
  4. The name ‘Solar’ indicates that the currency would be beyond global and eventually be used in colonies on the Moon, Mars and Callisto.

But that wouldn’t be Corporate money, that would be People’s money. That wouldn’t be in furtherance of surveillance capitalism.

Top 50 of Crypto Mining – June 2019

Today, June 14, 2019, we released the second biannual list of Top 50 cryptocurrency mining pools.

We do this in conjunction with the Top 500 supercomputing list that is released twice a year, in June and November. That list has been a matter of national pride for the US, Japan, China, and many other countries.

Cryptocurrency mining is a specialized form of supercomputing, producing billions of dollars of economic value per year.

In the Information Age, money has become information. Bitcoin is energy converted to information and encapsulated as secure immutable transactions on a time chain. This is money in the Internet, that we call Money 3.0. Currently it is primarily a store of value, a sort of digital gold, but it continues to grow use cases as a medium of exchange, and unit of account.

Cryptocurrency mining operations are large-scale, run on clusters, but also consist of highly decentralized pools that anyone can join and contribute their equipment to the effort, for proportionate rewards. Most mining is done on custom ASIC computing rigs, highly optimized for the relevant crypto consensus algorithm.

Using statistics readily available on the hashing rates and block production rates for the large mining pools, we can tabulate the economic value produced by these pools.

We consider only mined coins, that is, those that use some type of Proof of Work algorithm such as Bitcoin’s Nakamoto consensus.

We do not consider coins created with other types of consensus mechanisms, since they require no significant supercomputer-class computation. This includes coins produced through premining, Proof of Stake, distributed Byzantine Fault Tolerance and the like since supercomputing resources are not involved.

While there are a number of lists that provide hash rates and block production rates for pools mining a single coin, our lists are the first aggregation of which we are aware.

This raises the question as to how to compare mined coins that have radically different hashing rates and whose consensus algorithms, although often similar to Bitcoin conceptually, differ in the details.

We settled on the economic value of the mined coins that are produced. This enables us to make comparisons across coins when rank ordering the list of mining pools.

We compare the dollar value of a day’s mining from a given pool, with that of other pools, across the top eight mined cryptocurrencies.

The top 10 mined coins have market caps above $0.5 billion dollars, and the #1 coin, Bitcoin, as of our snapshot taken on May 30, 2019, had a market cap of $154 billion.

When we rank order the top 50 mining pools we find that the top eight mined coins in economic value are: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH), Zcash  (ZEC), Bitcoin SV (BSV), Dash (DASH), and Monero (XMR). All of these except Monero are ASIC-friendly, and production is dominated by ASIC miners and clusters. Monero relies on GPUs.

For Bitcoin, Ethereum, and Litecoin we have used 30 day averages as of May 30, 2019 for block production and hash rates; for the other coins 7 day average data was available.

From Table 1  below, which is across all pools, not just the Top 50, we see that total annual economic value run rate (extrapolated from the recent average daily values) is about $8.6 billion. About 2/3 of the economic value created is from Bitcoin production alone, with about $15 million produced per day recently. Ethereum amounts to around one-quarter of that at almost $4 million per day. The next six coins add another $4 million daily. Overall around $24 million per day is currently being mined from all pools.

Table 1: Top 8 Mined Coins (all mining pools, not just Top 50)

Coin Algo New / day Hash Rate Price 5/30/19 US$ Mined per Day M$ Yearly M$
Bitcoin SHA256 1800 47.1 Exa 8701 15.662 5,717
Ethereum Ethash 13,600 172 Tera 284 3.862 1,410
Litecoin Scrypt 14,825 352 Tera 118 1.743 636
Bitcoin Cash SHA256 1800 1.36 Exa 469 0.844 308
Zcash Equihash 7200 4 Giga 87 0.626 228
Bitcoin SV SHA256 1800 2.03 Peta 222 0.400 146
Dash X11 1693 1.68 Peta 172 0.292 107
Monero CryptoNight 1934 329 Mega 95.1 0.184 67
Totals



23.61 8,619

The locations of top mining pools can be multi-country. The next Table summarizes the major host countries for the Top 50 pools; China, the US, and Hong Kong account for 70% of the top 50 pools and almost all of the top 10 operators. China alone is responsible for nearly half of the annual value produced by the Top 50 pools. The Mixed category includes various combinations of US, China, the EU, Russia, or other Asian or European countries. This category has grown as Chinese operators begin to move to other geographies, as a result of pressure from the government to constrain cryptocurrency mining in China.

Table 2. Host Countries, Top 50 Pools

Country # Top Pools Daily M$ Annual M$
China 18 10.717 3911.7
US 11 4.77 1742.5
Hong Kong 6 2.77 1009.6
Mixed 12 2.69 980.4
Other 3 1.18 430.0
Totals 50 22.12 8,074

Table 3: Top 10 Pool Operators (aggregated results)

MultiPools Coins Number Daily M$ Annual M$ Country
BTC(dot) com BTC, BCH 2 3.06 1115 China
F2Pool BTC, ETH, ZEC, BSV, LTC 5 2.76 1007 China
Antpool BTC, LTC, ZEC, BCH, DASH 5 2.38 868 Hong Kong
Poolin BTC, ZEC, LTC, BSV 4 2.26 825 China
SlushPool BTC, ZEC 2 1.62 592 US
BTC.Top BTC, LTC, BCH 3 1.47 537 China
ViaBTC BTC, LTC,BCH 3 1.34 488 US
Huobi.Pool BTC, ETH 2 0.69 251 China
NanoPool ETH, XMR 2 0.50 182 US, EU, Asia
Bitcoin(dot)com BTC, BCH 2 0.34 124 US
Totals
30 16.41 5,990

We have aggregated, for the top 10 operators, their results across all of the top eight coins, and summarized in Table 3. Some operators mine two different coins, others mine as many as five of the top eight. These pools account for, when broken out by coin, 30 of the entries in our Top 50 list. 

The #1 operator is BTC.com based in China, and it produces $3 million a day of economic value. F2Pool, Antpool, and Poolin each produce over $2 million of cryptocurrency per day. These  large operators are responsible for $6 billion of the $8 billion annual production by the top 50 pools. Three of the five largest operators are in China, one is in Hong Kong, and one is in the US.

The winners in this race, for this second list, are Bitcoin, naturally, with BTC.com again as the top pool, and China as the host country for the most top mining pools, including both #1 and #2 positions. Hong Kong has the #3 pool. The US has the second largest number of mining pools.

The economic value of mining has increased substantially. In the first list of November, 2018 we looked at the Top 30 pools, responsible for some $5.5 billion of annual run rate of mining. This new list of Top 50 pools indicates $8.1 billion of annual cryptocurrency creation (even the Top 30 for this list amounts to well over $7 billion).

We intend to update this list again in November, 2019. Suggestions and comments may be sent to: stephen.perrenod@orionx.net

A presentation with the full Top 50 list is available at SlideShare.net

References:

Overall: coinmarketcap.com, coinwarz.com, cryptoslate.com

BTC: btc.com 

ETH: btc.com, etherscan.io

BCH: btc.com, cash.coin.dance 

LTC, ZEC, XMR, DASH: miningpoolstats.stream

Cryptocurrency topics: orionx.net/blog

Crypto Supercomputers: First Aggregated Ranking

Working with OrionX, we have just published the first aggregated list of cryptocurrency supercomputer mining pools, ranked by the economic value generated.

I have recorded a podcast about this list with Rich Brueckner, President, InsideHPC. You can listen here: https://insidehpc.com/2018/11/announcing-new-cryptosuper500-list/

A related slide presentation with a complete set of tables is available here: https://www.slideshare.net/mobile/insideHPC/announcing-the-new-cryptosuper500-list

The list is inspired by the Top500 supercomputer list that is released twice a year at the major supercomputer trade shows and conferences held each June in Germany (ISC) and each November in the US (SC).

That list is based on the performance of Linpack, a floating point intensive benchmark that solves a very large system of linear equations.

Supercomputers are based in a single location. They are very large clusters of general purpose CPU-based nodes, often augmented with GPUs, and frequently employing specialized interconnects.

Cryptocurrency mining is embarrassingly parallel. Many nodes can be racing simultaneously to solve the same cryptographic puzzle for the block reward. Mining pools may be centralized, but more likely they are decentralized to various degrees. Mining pools often have many contributors located in many countries, so even the concept of a host nation associated with the pool is fuzzy.

And the hardware employed is typically specialized ASICs or FPGAs, as well as the GPUs frequently found in traditional supercomputing simulation of science and engineering problems.

With mined cryptocurrencies, we must take a different approach and look at economic value.

For this initial list we looked at the top dozen cryptocurrencies by money supply, which is usually called market cap, and that is simply the number of coins created by a certain date, and the coin price on that date.

Of the top dozen, just half of those or 6 coins, are mined: Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero, and Dash. Other coins are generated by premining, airdrops, or consensus algorithms that avoid mining. As a result they are centralized to varying degrees and presumably less secure.

We chose October 30, 2018 to gather prices, supply, block production, and other statistics. This was prior to the Bitcoin Cash fork into two coins, so only the initial coin is considered for the first list.

Among mined coins, a range of mining consensus algorithms are used. Differing cryptographic hashing protocols may be used. Time windows and block rewards vary. Hashing rates have a tremendous range across the set of coins, from MHash/s with Monero to ExaHash/s with Bitcoin.

Thus we cannot compare across coins based on hashing rates and block rewards per se. Instead we look at economic value. For a given coin, one can rank order by blocks produced.

We ask what is the daily value of a certain coin produced by a given mining pool? How many coins at what price? We took daily averages for the prior week, and where we had better data, for the higher value coins, we used the prior month average daily rate instead. We then extrapolated the annualized value based on the average daily rate.

We compiled statistics for the 30 largest pools on a per coin basis. We also aggregated results for pool operators that produced more than one type of coin.

The first table is a table of average daily and estimated annualized production in millions of USD for the top coins. (With the very recent price slump following the Bitcoin Cash fork, the numbers would now be lower by about 1/4 if prices do not recover for a while). About $4 billion of Bitcoin is mined (minted) per year, and around $1 billion of Ethereum. Litecoin, Bitcoin Cash, and Monero collectively contribute around  $400 million (Dash did not make the cut).

Table 1: Top 5 Mined Coins

Coin

# Top Pools

Daily M$

Annualized M$

Bitcoin

17

11.31

4,129

Ethereum

5

2.77

1,010

Litecoin

5

0.64

234

Bitcoin Cash

2

0.38

140

Monero

1

0.10

37

Totals

30

15.21

5,550

Next is a table of the top half dozen pool operators, combining different coin types if they are mining more than one of the top coins. Three are in China, one in Hong Kong, and two in the U.S.

Table 2: Top Pool Operators (aggregated across top coins)

Top 6 Operators (across coins)

# Top Pools

Daily M$

Annualized M$

Country

BTC.com

1

1.901 694

China

Antpool

2

1.747

638

Hong Kong

F2Pool

3

1.585

579

China

ViaBTC

2

1.329 485

USA

BTC.Top

2

1.222

446

China

Slushpool

1

1.215

444

USA

Total

11

9.00

3,285

Bitcoin has its own decentralized, open source, version of a central bank and a clearing house system embedded in the Nakamoto consensus. Bitcoin is presently an emerging economy with over $1 trillion in annual transactions (GDP, gross decentralized product), supported by a very economical and efficient seigniorage of about $4 billion in mining block rewards, or less than 0.4%.

The indicated inflation rate at present is about 4% in supply, but in about 18 months the block reward will have its third halving. This will decrease the block reward to 6.25 Bitcoin from its current 12.5 coins. The inflation rate will drop below 2%.

This is not like your Federal Reserve that issues forecasts and goals. Recently the Fed has been pushing to increase inflation to 2%, and happy that they achieved the increase.

With Bitcoin this decrease in inflation will definitely happen, come hell or high water; it’s math, it’s baked in to the Nakamoto consensus. Relative to the US dollar and fiat currencies in general, Bitcoin will be disinflationary going forward.

The next list will be announced in June, 2019, and we can begin tracking developments in the cryptocurrency space over time.

Will Bitcoin Consume All Electricity?

The idea that bitcoin will consume an enormous fraction of the world’s electricity is hysteria.

In a recent article in the Communications of the Association for Computing Machinery, June 2018 issue, Nicholas Weaver (a lecturer in computer science at UC Berkeley) raised this issue, in what was otherwise a good article on the security issues around bitcoin.

Weaver quotes a statistic that cryptomining consumes more electricity than Ireland. This may be based on digiconomist.net, which runs toward the high end. Other estimates are only half as large.

He states “If there is profit in mining, the miners will keep using more and more power until there is no more excess profit available”.

This is true, but he overstates things. He evidences a lack of basic understanding of economics and how businesses operate, ignoring all the complexities that go into cryptomining.

Mining costs are a combination of fixed, and variable costs. The variable cost is primarily the electricity consumed. The fixed costs consist of facilities costs, equipment costs, and people and administrative costs. Equipment costs can run over 1/4 of the total.

Total global Hash rate over the past 12 months has grown from 5 to 38 Exahashes, a factor of 7.5.

Difficulty in the Nakamoto consensus protocol has grown by a factor of 7.

Revenue per Terahash per day grew from $1 to $3+ at the peak half a year ago and with the price collapse is down to $0.30. That is before electricity.

According to cryptocompare.com, with the current BTC price of $6500 and at $.10 per kWh for electricity the profit is just $0.06 per Terahash-day currently, but that is before any of the fixed costs are recovered.

If you are not covering your fixed costs plus variable costs you will not stay in business to consume electricity.

Here’s where Weaver really gets it wrong. He states “a 10x reduction in power consumption per hash for Bitcoin mining would have little real effect on Bitcoin’s power consumption. Instead, there would just be 10x as many hash computations needed to produce a block.”

Difficulty rates depend on the total cost burden.

His statement above completely ignores fixed costs. Whether it is an individual mining rig or a huge mining farm, the fixed costs of location, equipment and labor will generally be of order half the total cost.

Do-it-yourself miners in Mom’s basement or my friend Dan might ignore their location costs and equipment burden on their cooling and they might give away their labor for free. But their rigs aren’t as efficiently operated and their electric costs may be higher. They still have to amortize their equipment costs, at least for added ASICs and GPUs.

Suppose the gross revenue is $0.30 per THash-day and the fixed costs can be held to $0.10 and the electricity cost is $0.2. This is a breakeven business example with a large electricity burden.

Now reduce the power consumption per hash by 10x, in which case the total costs drop from $0.30 to $0.12. There would be incentive to increase total hash power by up to 2.5x not 10x. A factor of 4 overestimate.

In practice, it takes time to ramp up hash power. Supplies of equipment are tight. Data center spaces are limited. System administrators are not always available. There are both practical and regulatory restrictions on power available to mining farms. 

Furthermore, ASICs and GPUs for Bitcoin and cryptocurrency mining are in particularly tight supply. As demand goes up, there is a bidding war with equipment going for premium prices. This drives up the fixed cost component of Bitcoin mining.

Doubling capacity takes many months, and is subject to financial planning scenarios about future crypto prices, equipment delivery time lags, and electricity prices and availability.

According to digiconomist.net on July 5th, Bitcoin is just 1/3 of 1% of global energy usage (1 part in 300). Global GDP is some $80 Trillion and annual transaction flows of Bitcoin are over $1 trillion. So for over 1% of the proportional GDP the related energy requirement is proportionally 3 times lower.

According to an article in ZeroHedge, gold mining is much more energy costly. Per $ of value produced bitcoin and gold are roughly comparable, but there is a lot more gold mined.

https://www.zerohedge.com/news/2017-11-04/bitcoin-vs-gold-which-ones-bubble-how-much-energy-do-they-really-consume

award bars blur business

Photo by Michael Steinberg on Pexels.com

They state that per bitcoin the energy consumption is 6.6 million barrels of oil equivalent per year while the consumption for gold mining is 123 million barrels per year.

There are about 88 million ounces of gold produced per year, with a value of around $109 billion, versus 2/3 of a million Bitcoins, value around $4.3 billion. That’s a factor of 25 in value since bitcoin is 5 times more valuable comparing one coin to one ounce.

It seems that the total energy consumed in gold mining globally is around 19 times that of Bitcoin mining. And the number of bitcoins produced per year is dropping due to the halving every 4 years coded into the Nakamoto consensus.

The whole concept is designed to shift miners’ revenue toward transaction fees as the economy develops over time.

If you want to save the environment, focus on gold mining energy efficiency. Improve it by 5% and you can cover the entire Bitcoin mining energy budget.

For a variety of reasons, other cryptocurrencies are less energy intensive than bitcoin. They are also less secure, less battle hardened.

Bitcoin is a digital gold alternative that has the advantages of very low cost portability, and lower costs to secure and store.

It is a valid alternative to gold ownership as a store of value, and is a greener solution. There is a great deal of work (pun intended) on alternatives to Proof of Work mining, including Proof of Stake protocols and delegated Byzantine Fault Tolerant protocols. Also the growth of second layer solutions such as Lightning will support a larger economy and shift miners’ revenue more toward transaction fees.