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Hashrate Contracts Vs. Cloud Mining: What Are The Fundamental Differences?

Pros and cons of two remote Bitcoin mining methods

For years, cloud mining has been a great resource for Bitcoin enthusiasts who want to start mining and want the easiest path to hashrate.

Nevertheless, after some cases of scams and fraudulent schemes posing as cloud mining services, this method has been under the exhaustive scrutiny of the mining community.

Lumerin proposes hashrate contracts as a peer-to-peer alternative to centralized cloud mining. In this article, we’ll go through the main characteristics of each and compare both their advantages and disadvantages.

Cloud mining and hashrate contracts: starting definitions

Let’s start by briefly explaining hashrate contracts and cloud mining services.

Firstly, decentralized exchange of hashrate contracts consist of peer-to-peer “agreements” in which a miner pledges to deliver a certain amount of hashrate to a buyer during a specific period of time. To acquire that hashrate, buyers lockup payment in a smart contract upfront. The contract delivers the entire payment to the miner after hashrate delivery is complete.

On the other hand, centralized cloud mining services are a mining method where purchasers acquire Bitcoin miner compute power from a mining facility through an intermediary.

Currently, there are two popular cloud mining models. These are:

  • Hosted mining: Users buy or rent an ASIC miner hosted in a remote facility which runs, maintains, and cleans it for them.
  • Hashrate leasing: Users acquire Bitcoin mining compute power from a miner, receiving a proportional share of their mining proceeds in return.

It’s worth mentioning that, while the latter is similar to Lumerin hashrate contracts, they are fundamentally different in many aspects. Let’s dive into them.

Decentralization

The Bitcoin community’s most recurrent criticism towards cloud mining is often regarding its centralized nature. Indeed, these services involve a third party that acts as the intermediary between customers and mining facilities. When customers agree to purchase a cloud mining contract, this “middleman” contacts a partner mining facility to host, run, and maintain their miners.

Now, while this process takes the load off the users’ shoulders, it requires absolute trust from them on both the middleman and the hosting facility. They have no control or ownership over the acquired hashrate.

Hashrate contracts work similarly to cloud mining services, except that there is no intermediary involved. Customers and miners interact and transact directly through the Lumerin Hashpower Marketplace interface.

Without an overseeing third party, the Lumerin Node software can validate the hashrate produced, making sure it’s the agreed-upon amount, and granting control of it to the buyer. In turn, smart contracts and computer code ensure contract fulfillment and proper payment distribution.

Security and transparency

More often than not, the security factor derives from the grade of decentralization the mining contract entails. In other words, centralized services such as cloud mining involve significant risks.

Firstly, there’s counterparty risk, or the possibility that either the intermediary or the mining facility can’t fulfill their part of the deal. This has happened several times in the cloud mining sector.

While it’s worth noting that this can also happen in the Lumerin Hashpower Marketplace, the use of smart contracts as escrow services keeps the buyer’s funds safe until all the seller delivers the agreed-upon hashrate.

Should the miner fail to do so, the buyer can cancel the contract and pay only the proportional amount to the hashrate delivered. The smart contract will refund the remaining tokens.

Moreover, the terms of the agreement are public and visible to both parties, and transactions are recorded on the blockchain for increased transparency.

Intermediary fees

There is a deciding factor that weighs on the costs of using cloud mining services versus the Lumerin Hashpower Marketplace, and once again, it has to do with the presence of an intermediary.

In cloud mining deals, when there is an intermediary present, they usually charge fees — often paid by the customer — for their mediation services. Those fees constitute a net cut from the customer’s revenue. To this service cost, we also have to add maintenance, management, and other fees.

In contrast, in a bilateral agreement such as hashrate contracts, both parties settle the terms between each other and exchange assets directly without any mediation necessary. This reduces intermediary, maintenance, management, and service fees to 0%.

The Lumerin Hashpower Marketplace includes a unique 2% platform fee–1% for buyers and 1% for sellers over their contract value. There are no additional claiming or withdrawing costs besides the regular gas fees involved in every blockchain transaction.

Conclusions

We could see hashrate contracts as the next step ahead of cloud mining services in terms of security and decentralization.

Essentially, both are virtually the same thing — remote acquisition of proof-of-work computing power. Nevertheless, hashrate contracts replace mediators with smart contracts and computer code, improving efficiency and reducing friction.

The Lumerin Hashpower Marketplace is about unlocking the full potential of Bitcoin mining hashrate, both for miners and buyers.

We believe hashrate contracts are a huge step forward in terms of hashrate decentralization and accessibility, which in turn means a more decentralized, democratic, and inclusive Bitcoin mining landscape.

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