Proof of Work is Awesome
Originally published on May 10, 2016. Updated with latest data Feb 14, 2019.
Mining Bitcoin, or any other PoW- blockchain based cryptocurrency requires sending proof of expending actual resources to the network and earning a share of daily rewards generally proportional to the work contributed. Since the Bitcoin network is worldwide, if the same piece of hardware was run in two places on Earth, they would have market determined and possible unbalanced profitability, but in every place around the world where it stays at least profitable to be sustainable, it will be a competing market for energy, and all of it’s users will be working to keep their costs down. Every single node contributing to the Bitcoin blockchains hash rate is individually incentivized to do so as efficiently as they can, as they have two costs to consider, the sunk cost of the mining hardware itself, and the ongoing cost of the hardware’s power draw, and the maintenance and upkeep of that hardware. If they are counting on short term returns, miners are forced to sell the proceeds from their efforts pretty immediately, but the current cost to mine Bitcoin is such that many users have found it difficult to offer their mined BTC at rates high enough to maintain a margin while staying competitive with the rest of the market. As such, when market conditions are suppressed, sometimes miners shut down entirely, but that is generally not their preference, due to a function of the PoW mechanism itself.
As technology gradually (and sometimes suddenly) evolves, more efficient hardware will hit the market, at a lower power draw, higher hash-rate, lower purchase cost, or all three. Even if it’s unproven, some bleeding edge users will buy this hardware, so even if overall market of miners isn’t growing, each miners share of the overall work it produces will very likely constantly decrease, and likewise so will the reward for their efforts. ultimately the majority of users will constantly be searching for new hardware offering the best combination of lowest sunk cost and lowest ongoing costs for the most output and start to care much more about their waste, whether it be in replacing inefficient ASICs or recognizing the unnecessary waste of replacing a fully functional power-supply, network card and enclosure in order to keep their ASIC up to date; perhaps this may even lead to transitioning back to product design cycles in which products are designed to actually last again (like “the good ol’ days”) instead of the current product cycle where 99% of what we buy ends up in the land-fill within 6 months.
Sometimes rather than take their hardware offline, miners chose to move their hardware to where electricity is significantly cheaper, or even free. This has lead to a concentration of a great deal of Bitcoin’s mining hardware into a few regions of the world where electricity is especially inexpensive due to it being driven by renewable energy sources — this is a good thing when it comes to Bitcoin’s carbon footprint, right? Additionally, some users are holding their block-reward winnings until the market rate is high enough to let them sell without taking a loss — this is also a good thing, as it suggests that many miners believe that we are currently in a period where Bitcoin is sharply undervalued and electricity is possibly overpriced. Many miners look for other ways to use their hardware when the price of their favorite token is too low to be profitably mined. Those users sometimes direct their hardware at an auto-switching mining pool or a rental service where they can let their hardware work for someone else at a known rate per hour to run it. The fact that both of these markets are thriving (multipools & rig rental services) demonstrates a clear interest for owners of mining hardware to only turn them on when they are efficiently employed and we think it demonstrates exactly why PoW will not only scale fantastically but will soon begin to clearly demonstrate just how truly efficient its energy->security->value closed-loop mechanism is.
