Is Proof-of-Work doomed for centralization?
Issue: 036
Bitmain in the spotlight
A must read article from Sia team member, David Vorick, who wrote about their experience building Obelisk, a cryptocurrency ASIC manufacturing company. David spells out the ins and outs of the current state of the mining industry, particularly how Bitmain fits in. David suggests that there is no such thing as an ASIC resistant algorithm and that capitalism will always lead hardware manufacturers to build specialized chips that outperform generalized chips (GPUs, etc). He also goes on to discuss the economics of PoW, highlighting that any manufacturing industry will lead towards consolidation as margins get squeezed and the only way to turn a profit is through scale. It is inevitable.
Right now, Bitmain is the leading chip manufacturer and cryptocurrency miner. They run a smart savy business that generates healthy profits. Inevitably, other large manufacturers will see these margins and take action. Margins selling miners will head towards 0 and manufacturing will consolidate over the long run, however this does have a benefit towards decentralization: commoditization.
Currently, mining farms’ economics is a combination of cost of miner, cost of electricity, and cost of labor. The cost of the miner is a large portion of the overall profitability economics of mining farms such that many operations are priced out of competing simply because they must pay too large of a premium for the actual miners. If miners become commodified as suggested above, there will be no / negligible advantage to being a manufacturer and mining farm operator simultaneously. Mining farms can only differentiate themselves through cost of electricity and cost of labor. Both of these costs are inherently distributed across the globe creating a natural ceiling on what economies of scale can do for pure play mining farms. It is difficult to find large cheap electricity contracts and the labor required to operate is distributed among various countries.
So, while it does appear inevitable that manufacturing will consolidate around 2 to 5 manufacturers, this will drop the price of miners so that manufacturers like Bitmain don’t have an advantage over pure play mining farms. There may even be a day where Bitmain is forced to choose (or scale back) between manufacturing or mining because it is not profitable to focus on both at the same time. It is unclear whether the actual mining of cryptocurrencies will decentralize in the future, but if it is like other commodity industries, it should.
In other Bitmain news, the company is making (and leading) venture capital investments. This week, the company announced it led the $110M round into Circle, a wallet and exchange company based out of Boston. Bitmain CEO says the investment team is focused on blockchain technology companies for the time being.
The institutional money is coming
Coinbase made a few big announcements, introducing Coinbase Institutional. It has long been understood that Coinbase aims to diversify their services into a full blown financial services company that meets the needs of both individual customers, traders, and now institutions. Larger institutions have had trouble adding exposure to cryptocurrencies to their portfolio’s predominantly due to custody fears. Major wallets and exchange companies have announced their intention to reach this audience with various custody solutions and off book trading options, like the Winklevoss twins’ Gemini exchange. Coinbase is now structured as follows:
- Coinbase Custody will offer a secure way to store cryptocurrencies for larger institutions.
- Coinbase Markets. The company will continue developing its liquidity pool through a new office in Chicago focused on their existing cryptocurrency exchanges.
- Coinbase Prime will offer new and deeper tools for institutional traders.
- Coinbase Institutional Coverage Group will serve the needs of institutional clients by providing sales, sales trading, research, market operations, and client services support.
Project Spotlights
New section to highlight the projects and companies that are doing and not just talking…
GoTenna — the company is working in collaboration with Samouri Wallet and introducing the TxTenna, an application that allows Bitcoin transactions offline through the GoTenna mesh network.
0x — While some projects are still working on v1, 0x Project is rolling out v2, including support for ERC-721 and abstracting away the WETH wrapping experience for users.
Messari — the project introduced their white paper, outlining their goal to create a token and token curated registry.
Coda Protocol — Coda introduced their blockchain that aims to dramatically shrink the size of the blockchain by eliminating the need to keep the entire history of the blockchain to verify transactions.
