Over the past year, Notation has slowly but surely been growing our blockchain mining practice. Today we’re announcing that it will become a more significant part of our firm, as we continue to grow our internal operations, as well as through our partnership with Bison Trails Computing, a mining company run by Joe Lallouz and Aaron Henshaw.
Cryptocurrency mining is a rapidly evolving and dynamic space that now encompasses a wide variety of activity including traditional proof-of-work mining, new forms of proof-of-stake mining, merkle mining, validation mining, and many other forms that are coming to market soon. We’ve been referring to this new era of mining as “Mining 2.0,” but we’ve heard other like our friends and partners at CoinFund, refer to it as “Generalized Mining.”
We believe that as blockchains evolve into the era of Mining 2.0, it will become increasingly important for investors, builders and other stakeholders to actually participate in these new networks, and we’re really excited to do just that. Aside from what we believe will be lucrative financial opportunities (more on that below), we think this shift is more consistent with what the blockchain ecosystem purports to represent — more meritocratic and decentralized participation (and a more responsible use of energy too). When the bitcoin network was started and launched, no VC had special access, there was no pre-ICO token sale at a discount for whales looking to flip the token — anyone that was interested could simply spin up a node and earn bitcoin for lending their compute to the security of the network.
Participating in blockchain networks today is easier said than done. It’s often quite difficult for non-technical participants, and in many cases more difficult than it should be. Participating in Mining 2.0 today requires expertise in a number of diverse practice areas, including infrastructure, hardware, security, marketing, among others. In a recent tweetstorm, Jake Brukhman highlighted the many varied ways one can now participate in blockchain networks, as well as the expectation that investors will likely have to adapt to a new reality that’s focused as much on building and participating as investing. We expect some firms to build this expertise in house and some to partner with external parties (we’re doing both), but we believe that for crypto investors that are purely financial in nature, getting access and insight into the best projects will become harder over time.
In order to highlight how significant we believe this shift will be, we’re including an overview of a few of the major items to consider for Mining 2.0. We also share some specific data from our our recent work running infrastructure for the Livepeer network, which is experimenting with many of the Mining 2.0 concepts mentioned above, and one of the networks we’ve been most excited about building for in recent months.
- Software Requirements (Dev Ops) —When Livepeer launched on mainnet a few months ago, nodes on their network began work transcoding. Notation was one of them, and Alex recently shared some of his work on getting a node up and running. Building infrastructure on the Livepeer network today is relatively approachable for the average technical participant, but as transcoding activity increases in the months and years to come, we expect the time and cost required to maintain this infrastructure will also increase. Nonetheless, we think the work we’ve put in to date is well worth it. Combining our Livepeer transcoding node along with our participation in their delegated proof-of-stake inflationary economics, we’ve been earning approximately 2% Daily in IRR on top of our initial early investment in the network.
- Software Requirements (Code) — Livepeer also recently launched their merkle mining system. There are a number of inputs to consider in a cost analysis (gas prices, hosting costs, LPT mining splits, etc.), and you can run the merkle mine manually, but to scale merkle mining systems and others like it, you’ll need to write code to automate the process. For example, we’re now algorithmically mining LPT as low as $.30c / LPT in a mostly automated manner. To put this cost in perspective, this is lower than any price a private investor paid to purchase LPT, including our own initial investments. We believe that rigorous financial analysis (here’s our Livepeer model) combined with efficient code may offer better economic returns on other networks as well compared to early-stage private investments, with significantly less risk taken.
- Hardware Requirements — Although the hardware requirements for Livepeer are minimal today, and many of the new proof-of-stake networks are less hardware and capex intensive than traditional proof-of-work mining, requirements still exist for many networks (Cosmos, Decred, etc.), particularly those that are blending proof-of-work and proof-of-stake consensus algorithms.
- Security Requirements — For miners and participants that are earning tokens on a regular basis, taking both a professional, but practical approach to security is no easy task, and obviously critical.
- Marketing Requirements — For many of the new delegated proof-of-stake networks, including Livepeer, marketing becomes really important to build one’s stake. Here are some examples of transcoder campaigns, and if you’d like, you can delegate to ours here :-) It’s worth noting that the top ranked transcoder right now in terms of stake is a fellow named Anson, who lives in Hong Kong, who had no special access to the project, and was simply early and consistent in his marketing strategy and infrastructure plan. We believe there will be a number of “branded” nodes built to go after this opportunity, some of them already in market or coming soon. The existing VC firms have an advantage here today, as many of them are already good marketers with established brands, but they’ll have to get to market quickly before that advantage erodes.
These are just a few of the required skills in order to participate in Mining 2.0. Capital will remain an advantage in blockchain investing and mining, particularly in the early days of new networks where you can stake towards your own node, but of all the items on the list above, capital alone is not enough to build a competitive advantage in this new era. We believe Notation is well positioned given our history investing in blockchain projects, but also as investors who build things, write code, and run infrastructure.
Like many others that are investing and participating in this new generation of blockchain networks that are coming to market, we realize that Mining 2.0 is in it’s early infancy. We’re super excited to participate in these communities and learn from others, and to be frank, we still have more questions than answers. Should we be building more internally? Partnering? Outsourcing? It may be some combination of these strategies or something else entirely. Our learning curve in this particular area of blockchain remains steep, so if you’re interested (or already participating) in Mining 2.0, we’d love to chat with you, compare notes, and see how we can collaborate with each other. Please reach out!