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The Economics of Mining Cryptocurrency

From environmental impact to 51% attacks: Field notes on crypto mining

We’ll be summarizing some of the great events we’re attending, in the new series we’ve launched called Field Notes. This is Vol. 1. Enjoy!

From left, Qasim Virjee, Founder & CEO — StartWell; Scot Johnson of mining company Digital Shovel, Shelly Gray of Canada Blockchain Group, ePIC Blockchain’s Scott Howard, and Alim Khamisa of HyperBlock

The mining landscape seems to be in a state of constant flux, and at StartWell’s event The Economics of Mining Cryptocurrency, a variety of industry leaders and innovators converged to discuss the ins and outs of the industry, the regulatory and technological challenges they face, and the environmental impact of mining. Below is Shyft’s summary of what stood out for us and seemed interesting to capture and share. StartWell recorded the event, too (fantastic idea, thanks!) so go here for the audio:

Defining the Boundaries

To kick things off, the speakers — including ePIC Blockchain’s Scott Howard, Shelly Gray of Canada Blockchain Group, Scot Johnson of mining company Digital Shovel, and Alim Khamisa of HyperBlock— were prompted to provide a general definition of mining — what it is, how it works, and what it requires. As Howard quickly sketches out:

I guess it depends on what the consensus algorithm we’re working on a variety of different ways of thinking of the process of mining, but consensus is agreeing on a transaction being valid, and mining in terms of hardware, which a lot of us do, is the process of doing some work, in this case, trying to solve a random puzzle to show that you have put enough effort in to get a vote on that consensus.

After a prompting to unpack the concept of consensus, Howard continues:

Let’s say I started a cryptocurrency today and I want to call it the Scottcoin and I want to send a coin to you. I’m going to yell out to the rest of the room and say, “Hey, I’m sending 1.2 coins.” Everybody else in the room has a copy of the public ledger, which is the blockchain of every transaction to ever exist. They can then vote on whether or not that transaction’s legitimate or not in order to get rights to both — vote’s the wrong term, I’m just simplifying it. They have to solve a puzzle in order to be part of that consensus pool. Consensus is that group coming to an agreed consensus that can track that the transaction is valid and adequate to the blockchain.

While the discussion on different forms of consensus (proof-of-stake vs. proof-of-work) is ongoing, debate on the relative merits and risks of each model rages on. Gray expresses her main concern about proof-of-stake:

Personally. I think that a proof-of-stake just really limits the participation and the amount of people that can participate because it just makes it a big boy’s game. And right now there it just…it makes the market smaller.

Mining, Energy and Profit

The precise amount of BTC a standard unit can mine over the course of a day is deemed to be roughly $4, with energy costs hovering around $1.30 per day, assuming a reasonable local electricity rate. With these facts in mind, the panelists offer some advice to new or aspiring miners:

…the thing that I think is really important for anyone that’s interested in mining is to think about difficulty. So difficulty’s essentially…like the big one blockchain has built into it, its governance model and its algorithms. It wants to produce a block every 10 minutes. So if the four of us have a miner, and we’re producing blocks every 10 minutes. Now, [someone else] joins and he’s got a miner, so now there’s more hash power on the network. The block time is probably going to decrease a little bit. So the bitcoin blockchain automatically adjusts the difficulty up to maintain that 10 minute standard. Um, so what’s happened since December is there’s been a shit ton of Hash power that has kind of joined the bitcoin mining network and for almost every blockchain for that matter. And I’m gonna throw out some numbers just to kind of put this into perspective. So, in 2017 the difficulty rate went up by 490 percent for just the Bitcoin blockchain, if you look at Ethereum, it went up by 2300 percent. So that means the direct correlation between that increased the revenue, like yeah. In December I was able to mine a bitcoin in let’s say six months. It’s gonna take me two years now, two years or longer.

The natural endpoint of this “margin compression” is that only the leanest operations with the greatest access to the cheapest electricity will be able to thrive. They make sure to emphasize, however, that even when the margins are slim and the amount of BTC (or any other crypto asset) that can be mined in a given timespan has reduced compared to previous quarters, that the mining itself acts to “underwrite” the long-term security and viability of the network, helping to ensure that the value accrued is immutable and has a solid trajectory.

In response to questions about the viability of mining versus simply purchasing as an investment strategy, Long advises that the best option is to maintain a diverse portfolio of stable coins and “shitcoins” that you mind the rhythms of and mine (or simply invest in) at strategic times.

There’s also some discussion about the merits of dedicated ASIC mining devices vs. more old-fashioned CPU mining — using your computer’s graphics card, for instance, to mine. There exists the risk that if you’ve purchased a dedicated rig specifically to perform a certain type of crypto mining. There’s a chance it could become outmoded or no longer suited to your purposes within a relatively short timespan, leaving you with not much more than a “shiny paperweight.” One of the difficulties facing the mining space is creating rigs that will still have some residual value if and when they’re rendered suboptimal for mining.

Mining and Security

Here’s a quick and dirty explanation of 51% attacks, to help frame the conversation, from one of the panelists:

In theory. If I had enough hash power and I sent money to you, you sent it to him and he sends it to her, I can go back and remine those blocks and if I can prove that I got more confirmations, I could then create a new chain; so while you went and bought a car from him and he went and bought it from her, I can go back and make those transactions not exist because I had more hashing power which means I can get more confirmations, which means I can have more people form a consensus on the transaction than can validate your previous transaction.. So when we refer to a 51 percent attack, that’s what we’re referring to.

There have been incidents where malicious actors have made use of hashing farms to carry out attacks like these, paying a comparatively small sum to use a lot of hashing power for a limited time rather than having to build those resources on their end.

Race to the Bottom: Whoever has the most electricity for the cheapest price wins

The simple fact of mining: “Whoever has the most electricity for the cheapest price wins.” Up until recently, Quebec was seen as a mining haven due to their relatively low electricity costs, but the province put the kibosh on new applications starting in May. As one panellist explains, the provincial government clamped down on the sector because they feel that mining projects don’t contribute to the local economy.

These sorts of restrictions are among the principal challenges that mining operations face. As a result, the biggest player in the space is China-based BitMain, who aggressively lobby for control of a massive amount of energy — as one of the panelists put it, “More than what some entire countries use.” As a result of Quebec’s clampdown, the most promising current environment in Canada is in Alberta, where a network of private power plants not connected to the main grid can be negotiated with to provide relatively cheap hashing power derived from natural gas. They acknowledge this is not the environmentally ideal solution, but it still beats coal, which Chinese miners rely on. Also, many natural gas producers are just burning off their excess, where it might as well be put to use in the mining sector.

On the bright side, there are emerging prospects of solar-derived mining — areas such as the Gobi desert are floated as potentially low-cost, high-energy prospects. For local governments and businesses, capturing that energy and turning it into value directly could prove more lucrative than risking the liabilities created by a physical pipeline. There is, however, the cited problem of the duck curve, which might necessitate the development of battery-based storage for periods when the sun isn’t out. The focus going forward should be on avoiding politically unstable areas where regulations or attitudes could pivot on a dime, while also finding ways to create sustainable operations, including potential low-cost-of-entry options for less economically privileged populations.

This summary was brought to you by Shyft Network Media.


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