Today Slush Pool is celebrating the 10th anniversary of the first block to ever mined the pool, Block # 97834. It’s been an incredible decade and we are proud to have won over 1.25 million BTC since then.
However, this is not going to be a feel-good reflection on the past 10 years. Instead, this piece is going to focus on our vision for the The next 10 years as this will be the decade that will determine whether Bitcoin mining can meaningfully remain decentralized as listed companies, energy producers and even major governments become increasingly involved in mining and the larger Bitcoin ecosystem.
In fact, it’s important for people to know that this transformation is already happening at a rapid pace. Amanda Fabiano, head of mining at Galaxy Digital, explained how miners are gaining access to cheap power on a variety of scales, “from small-scale, off-grid miners using waste gas from oil and gas fields, to large-scale miners running their own underlying infrastructure with the capability. to take advantage of power arbitrage, to power producers who are starting to question bitcoin mining. “
After the sustained bear market of the past few years and the most recent halving in May, the miners still operational today are here for a reason. As Fabiano put it, “The mining industry has graduated from elementary school and miners are embarking on a new wave of professionalism with creative solutions to achieve their goals.”
In the rest of this article, we’ll tell you how this industry-wide professionalization is impacting us and our plans to adapt and fix some of the biggest issues miners face today.
The market is changing, and so are we
When Slush Pool was founded, the idea of a mining pool was pretty simple: many small miners pool their hash power to reduce the variance with which they earn rewards. The greater the pool’s market share, the lower the variance should be for the miners.
Today most pools don’t work. The value proposition of the typical pool is no longer lower reward variance (i.e. less time between rewards), but instead, it essentially is No variance (i.e. continuous rewards). Miners submit proof of work to pools in the form of shares (hashes relatively close to the difficulty goal), and pools pay for each share regardless of when the pool finds blocks itself. This reward scheme is called pay-per-share (PPS) and effectively creates pools hash rate buyers, moving all short-term variance risks from miners to pools.
Not only that, but competition between pools is so fierce that medium and large miners can negotiate extremely low fees, so there is very little money to be made even with a PPS offering. Meanwhile, the risk is enormous.
As PPS becomes more common, industry-wide pools are being pushed toward vertical integration – diversifying revenue streams by offering miners other products in addition to the pool.
We at Brain, (the company that has operated Slush Pool since 2013), are vertically integrated through Braiins OS +, an ASIC optimization firmware that helps miners improve their hardware performance by 20 to 30 percent. Moreover, that is only part of our future.
The commodification of hash rate
The trend that we believe will determine the next 10 years of Bitcoin mining is the commodification of hash rate. Simply put, mining companies want to reduce risk and get stable, predictable cash flow just like traditional companies. That is currently what they are missing.
Of course, PPS payouts stabilize BTC earnings for miners in the short term. However, what PPS doesn’t do is reduce long-term risk due to the volatility of two other variables: BTC price and network difficulties.
Leo Zhang, founder of Anicca Research and an industry leader in hash power funding, categorized the current landscape as a crossroads, saying that “it is a multi-billion dollar ecosystem built on top of highly industrialized individual operations. Meanwhile, the miners rely on very primitive risk management tools and therefore bear the lion’s share of the market risk. “
As long as miners pay their electricity bills and other fees in local fiat currency, BTC’s price volatility has a significant impact on cash flow. A major price drop can turn a profitable ASIC into a useless money burning machine in the blink of an eye. Likewise, a steep upward difficulty can increase a miner’s production costs beyond the threshold at which it is profitable.
With miners making millions of dollars in capital investment in ASIC hardware taking many months or even years to produce a positive ROI, exposure to price and difficulty risks is extreme. It is, in fact, a proof of stake built into the proof of work.
Reducing exposure to this risk is a clear requirement for miners.
Zhang also sees this trend taking shape, adding, “Just like how capital markets evolved for traditional commodity producers, it is a logical next step for Bitcoin mining to have its own tools to help miners better manage risk.”
In fact, since the end of 2018, we’ve been working on building a platform to help them do that: a transparent hash exchange rate where buyers can buy hash rate from miners and speculators can trade derivative contracts on the future value of hash rate.
In 2021, Braiins will move from primarily operating the pool to a stronger focus on facilitating hash exchange rates, both immediately through a spot market and long-term through forwards and futures markets – allowing miners to earn a steady return for their hash power for the duration of the contracts.
This is the last piece of the puzzle that makes mining Bitcoin comparable to producing other commodities such as oil, corn or gold.
How Stratum V2 can play a role
Miners are often seen as purely profit-driven operators who don’t care much about Bitcoin and simply create constant selling pressure in the market. In our experience this is far from reality. Many miners have been on Bitcoin for a long time and keep their profits in BTC instead of selling all their earnings in fiat.
A good example of this long BTC miner profile is Great American Mining (GAM), which helps oil and gas producers reduce ventilation and flare (methane emissions) by consuming their waste gas to power ASICs. GAM’s Marty Bent said they are “proud to contribute to the geographic distribution of hashrate production.” We know many other decentralization conscious miners such as GAM.
The long BTC demographics of miners is who we envision as the early adopters of Stratum V2 job negotiation (allowing miners to choose their own sets of transactions instead of just pools that do it). However, one of the more interesting aspects of emerging hash-rate markets is that they are redefining who can be a “miner” at all.
Bitcoiners and Bitcoin companies that do not have in-depth knowledge of the oil and gas industry or connections to a hydroelectric power plant will be enabled for the first time since the pre-ASIC era to contribute to the geographic distribution of hash rate through hash rate and use Stratum V2. There is no guarantee that anyone will actually seize this opportunity, but it is nevertheless worth making it possible, given the inevitability of the commodification of hash power.
Bent nicely summed up how this could shape a bright future and explained that “more mature derivatives markets will allow us [at GAM] to hedge operational risk and Stratum V2 will reduce the risk of centralization of the mining pool as the attack vector for Bitcoin. “
The show continues
As we celebrate a decade of adding blocks to the Bitcoin blockchain, we would like to thank all the miners who have joined us over the years, from the early days with a single server in Slush’s office to our over 30 members counting Braiins team. through Jan Čapek and Pavel Moravec today.
As we look at the changes ahead, we welcome the opportunity to reinvent ourselves and adapt along with other mining companies as the financialization of hash power takes place. Cheers to the next 10 years of building in Bitcoin, and to the miners who make it all possible.
This is a guest post from Daniel Frumkin. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.