When my friend AdventureDr offered to run an Antminer S9 for a month and let me have the rewards in exchange for supplying him with the BTCTKVR magazine, I couldn’t say no to his generous offer. In preparation for this special occasion, I set up a Slush Pool account and sent AdventureDr the information required to link the S9 to my Bitcoin wallet.
So for the next 30 days, my new worker has contributed to the discovery of 200 Bitcoin blocks. During this reward era, each new block offered a reward of 6.25 BTC. Which means that in one month, the Antminer S9 has successfully helped add 1250 bitcoins to the total supply.
So I should be rich, right? Well, no. You see, having joined Slush Pool means that I’ve opted for collaborative mining with other workers around the world. Instead of trying to get the entire reward for myself with very low odds, I’ve opted for more frequent but smaller mining rewards.
With a hashrate of approximately 13 terra hashes per second (that’s 13 thousand billion h/s), the Antminer S9 has been one of the ~143.000 Slush Pool workers that generate an output of 7,272 exa hashes (7272 millions of billions h/s). Therefore, the device that AdventureDr ran for me only produced ~0,0000179% of the entire pool’s Proof of Work.
At the time of writing, the Bitcoin network is secured by a hashrate of 161,9 Eh/s. Which means that Slush Pool only produces 4.49% of the whole Proof of Work, and my gifted Antminer S9 provides 0.000008% of Bitcoin’s security. This seemingly-insignificant percentage is also reflected in the mining rewards I’ve received.
During my month as a remote miner, I’ve earned a total of 0.00237392 BTC (2373,92 bits, or 237.392 satoshis), which at the current price of $61.258 are valued at $145,82. Of Slush Pool’s 30-day revenue of 1250 bitcoins, my one Antminer S9 has produced ~0,00019%.
These mining gains don’t include equipment, electricity, and maintenance costs.
On average, a used Antminer S9 costs about $600 on eBay. And the ASIC miner’s power draw is 1800 watts per hour, which adds up to 1296 kilowatts per month. Where I live, one kilowatt costs about 15 cents. So running the S9 for 30 days would cost me no less than $194. Which means that, if I were to sell the mined BTC to cover electricity costs, I’d lose $48,18 every month.
Luckily for me, I get to keep all the BTC and my electric energy bill will be the same as every month – AdventureDr was very fond of the BTCTKVR magazine and ran the ASIC miner for me from his dedicated facility. But if I were to purchase the Antminer S9, I’d pay $600 and subsequently cover a monthly electricity cost of $194 to keep it running.
I would definitely break even and recover my initial investment if I could afford to HODL while the price of BTC goes up in the coming years. But from an economic point of view, it would make a lot more sense if I used the $600 and energy cost of $194/month to buy bitcoins. Within the same time frame, I would have a significantly greater return of investment and never have to deal with the anxieties of running an unprofitable mining operation.
Naturally, one can make two arguments:
- that I should get a more efficient machine (more Th/s with the same energy consumption) to make a monthly profit and eventually break even with my investment;
- that I should take the Antminer S9 to a place where the electricity cost makes mining profitable (as is the case of AdventureDr).
So if it’s more profitable to buy bitcoin than to mine it, why bother?
Well, there are two very significant reasons. First and foremost, it’s important to contribute to the security of the Bitcoin network. We shouldn’t let it centralize in large data centres which get the cheapest electricity rates and leverage economies of scale to turn out enormous profits. Sure, they provide reliability because it’s in their best financial interest to keep the operation going 24/7. But they are also easy to regulate and take down by governments.
During Satoshi’s short tenure as developer, educator, and technical advisor he envisioned Bitcoin mining as something that all nodes can do with their CPUs. The competition to discover the next block was a process that all participants would pursue individually. In the whitepaper, Nakamoto even defined Proof of Work as “essentially one-CPU-one-vote”.
This kind of decentralization guarantees the network’s censorship resistance and reduces the chances of having one big actor who attacks the network – beyond the incentives, it’s technically and computationally more difficult to have a single malevolent CPU whose hashpower exceeds the added efforts of all the honest miners.
But in November 2010, Satoshi observed the rise of Slush Pool’s collaborative approach – a discovery that would forever change the economy and game theory of Bitcoin mining. Czech cypherpunk Marek “Slush” Palatinus basically asked himself “What if miners, instead of competing with each other to get the full block reward, worked together to discover blocks faster and subsequently shared the newly-minted bitcoins according to their contribution?”
Ever since, we have seen the rise of mining pools and we have observed the various dynamics involved in having an oligopoly of hash power. Miners looking to get frequent rewards would look for the pool which granted them the largest chunk of the block subsidy at the most consistent rate. Instead of doing solo mining to have the same odds as winning the lottery, they would put their hashing power together to get paid more often and be able to finance their operations more predictably.
In theory, no pool should become too big and potentially threatening to the Bitcoin blockchain immutability. But in practice, Bitmain did control more than 40% of the hash rate in 2018, and at the time there were concerns about the implications of this mining centralization issue. A similar debate took place in 2014, when GHASH.io controlled about 40% of the hash rate, while BTC Guild had a share of approximately 25%.
Sure, mining pools are not companies that control every device that works for them. Many participants are independents who switch to the pool that pays them best for their work. But hypothetically speaking, if a few dominant pools join forces to reorganize blocks and reverse transactions, they can pull it off. And this is a scenario that we must avoid.
Independent mining from home is essential for the Bitcoin network: it contributes to the decentralization of the hash rate and increases the censorship resistance of transactions. Because yes, miners can choose not to pick up certain transactions originating from blacklisted addresses (at the expense of not collecting the transaction fees paid). Therefore, mining altruistically helps remove discrimination and therefore increase the fungibility of bitcoin as a currency. Even if it’s not always profitable in fiat terms, it provides a great service.
Now let’s talk about the second reason to mine Bitcoin, which is more selfish and has more to do with the state of human politics and laws: the newly-minted BTC is not KYC’d. This means that you receive coins that aren’t tainted by a regulated custodian which deanonymizes transactions. Mining is a lot more private than buying from an exchange, and there are even individuals and businesses that choose to purchase their bitcoins directly from the miners to avoid any kind of documented traceability.
In countries where Bitcoin is banned or excessively surveilled, mining helps people escape Big Brother. Those living under totalitarian regimes may need to mine BTC to earn the kind of money that makes them free and sovereign. And most of the times, they need Bitcoin to bribe corrupt officials in order to be allowed to start a new life somewhere else.
The case for mining Bitcoin from home
To accomplish our decentralization goals, we need SHA-256 ASICs that are designed for home use. Not just repurposed industrial-scale mining rigs, but devices that anyone can run in their living room while making minimal profits. A remarkable product that caught my attention is the Futurebit Apollo BTC. It has an output of about 3 Th/s at an electricity consumption of 200 Watts, with an extra Eco mode which makes it draw only 125 Watts while running more quietly.
I did the math and, if I were to run the Apollo instead of the Antminer, I would make a monthly profit of $1 (at the current BTC price). Which means that I’d need about 800 months to recover my investment, granted that the electricity cost, bitcoin price, and mining difficulty remain constant.
But then again, the point of getting one of these is not to get rich, but to support the network. At 150 Watts/hour, it consumes 10 times less energy than continuously running an economical air conditioning unit. And during winter time, I can use Turbo mode to produce more heat and keep my room warm (it would actually be interesting to cut my reliance on natural gas).
This is not, by any means, an endorsement for the Futurebit Apollo BTC miner. Their device is expensive for what it does and it’s being produced in such small quantities that it sells out before I get the chance to buy one (happened to me 3 times this year). I know that identical results can be achieved by downclocking an older and more affordable industrial-scale ASIC device, but the hardware’s reliability is always questionable.
Conversely, I wish more companies were ideologically aligned with this movement to decentralize Bitcoin mining through individual users. We should have a small, energy-efficient, and quiet miner that we keep next to our internet router. Just like we run Raspberry Pi nodes, we ought to also have similar mining hardware and pools that support it. In the true spirit of “don’t trust, verify”, we should diminish our reliance on large-scale, compliant, and politically-fragile mining farms.
Yes, our full nodes can reject the blocks created by dishonest miners. But at the same time, miners can play by the Bitcoin network consensus rules and never pick up the transactions that you broadcast. There is nothing that nodes can do to push miners to write a certain transaction in a Bitcoin block. And this censorship resistance is not given to us by Satoshi, the whitepaper, or some ideological belief in the Bitcoin network’s virtues – we need to claim it by running our own operations with our own hardware.
In the end, I didn’t get rich mining Bitcoin. But I’ve learned an important lesson about profitability, economies of scale, the limitations and technical obsolescence of ASICS, and how nation states can discourage us from mining by adding extra taxes to electricity. But most importantly, I’ve rediscovered the significance of voluntaryist decentralization. We shouldn’t expect others to honestly secure the Bitcoin network – they have the farms, but we have the numbers.
A crash course in Bitcoin mining
Bitcoin mining is the energy-intensive process which secures the Bitcoin network. Approximately every 10 minutes, a new block gets discovered – and the first miner to solve the complex math problem gets rewarded with the block reward and the transaction fees that users have paid to prioritize their transfer.
In exchange for providing security to the network, Bitcoin miners also become participants in this winner-takes-it-all race. There is actual energy cost involved in the production of every BTC unit, and it’s always more expensive to attack the system than to honestly participate in it. Basically, the security of the Bitcoin network relies on the competitive greed and financial self-interest of the miners.
The system is based on Dr. Adam Back’s Proof of Work, which was first included in hashcash in 1997. In its first iteration, “mining” was a way to prevent e-mail spam. To make sure that senders would no longer fill the inboxes of an unlimited number of recipients at no financial cost, e-mailers would have to either use their computers’ processing power to mine some hashcash or else make a payment for every e-mail. This way, spamming would incur computational or financial costs.
Satoshi Nakamoto took the principles of hashcash and used them to solve the Byzantine Generals Problem (also known as the Bytzantine Fault Tolerance). Essentially, the issue of “how do we make sure that decentralized participants who don’t communicate with each other will coordinate to accomplish the same goal in an honest way?” was solved with Proof of Work and incentives. This is part of what we sometimes call the “Nakamoto Consensus”.
The Bitcoin blockchain is ruled by the laws of physics – and more precisely, entropy as a consequence to the first law of thermodynamics. Every event is made possible by energy consumption, and therefore becomes provable and irreversible. This is of utmost importance for the security of transactions, as they need to be resistant to human politics.
It’s generally agreed that after six new blocks have been mined, the costs of launching a blockchain reorganization attack are far too great to reverse an older transaction. Spanish mathematician Ricardo Perez-Marco and French math researcher Cyril Grunspan have even published an academic paper in which they argue that 2 network confirmations are more than enough to determine the finality of a transaction, specifically due to the multi-million dollar costs involved in undergoing an attack against it.
Bitcoin miners compete for a block reward which diminishes by 50% every 210.000 blocks (approximately 4 years). In the beginning, the subsidy was 50 bitcoins for block. In November 2012, the 210.000th Bitcoin block was mined and the new reward went down to 25 BTC. Since block 420.000 (July 2016) and until block 630.000 (May 2020), successfully solving the complex math problem while securing the network was rewarded with 12.5 BTC. Right now, the block reward is 6.25 BTC, and it’s gonna get split in half once again after block 840.000 (sometime in 2024).
This is how the entire supply of 21 million bitcoins gets issued. It will take until the year 2140 (the 34th halving epoch) to have the entire supply released. But this doesn’t mean that mining will come to an end. Satoshi Nakamoto’s design is to have transaction fees as a second incentive. And within a couple of decades, the sum of fees will be greater than the block discovery reward.
Every Bitcoin transaction is data which takes up space from the Bitcoin blocks. So in order to have your transaction included in a block, you need to pay a certain amount of BTC units for every byte of data you’re going to occupy. As the demand increases, a game of prioritization begins in favor of the highest bidder – the Bitcoin users who pay the most for their transaction are the ones who will receive confirmations first.
So the money paid in transaction fees go to the miner (or mining pool) that discovers the block. Which means that the total block reward for the miner consists of the subsidy available during the corresponding epoch (which is constant across 210.000 blocks), plus transaction fees. For example, miners in 2021 will collect 6.25 BTC from the block reward, as well as ~0.05 BTC extra from transaction fees (at a median fee of 4 sat/byte).
But as more miners join, the difficulty of discovering a block increases exponentially, right? Which means that more energy needs to get consumed in order to produce more bitcoins over time. Well, not quite. Satoshi Nakamoto has designed the difficulty readjustment system.
After every 2016 blocks, the difficulty gets readjusted according to the existing activity: if more hash power has been added during the previous 2016 blocks cycle, then the difficulty gets increased. But if miners start giving up due to their individual economic self-interest (the cost of electricity gets higher than the reward), then the difficulty of discovering blocks will drop.
This dynamic process creates unique opportunities to seize the perfect moment to start mining, and also leads to a continuous search for lower electricity costs. When a miner gives up and the difficulty drops, there will always be someone else on the other side of the world to take advantage of the chance to get more bitcoins with a lower effort.
Coincidentally, the most affordable kind of energy is the one that’s generated from renewable sources. Bitcoin’s Proof of Work mining has started a global quest for inexpensive electricity: in China, miners used water wheels (hydroelectric energy); in the United States, miners burn the natural gas that normally gets wasted during oil extraction; in El Salvador, it’s the geothermal energy of volcanoes that gets used to power ASIC miners.
And all around the world, the surplus energy that power plants produce and power grids can’t transport to consumers gets used to secure the Bitcoin network and generate some extra profits. What some describe as a wasteful process actually incentivizes the expansion and development of renewable energy.
Bitcoin mining is one of the most dynamic industries in the world. Since January 2009, it has managed to transition from the original design of “one CPU one vote” to GPU mining, and then give birth to a lucrative business of ASIC (Application-Specific Integrated Circuits, or specialized computers that can only perform one task in a very efficient way) devices.
Mining from home has quickly migrated towards industrial farms, and for a while most of this activity took place in China. But since the second half of 2021, due to China’s authoritarian policies, the new leader in Bitcoin mining is the United States of America. However, my hope is that hardware companies will find creative ways to bring Bitcoin mining back into people’s homes.
Crafty people around the world have already found ways to use the heat generated by Bitcoin miners to warm their homes, or boil hot water for their showers. In the end, human ingenuity is infinite and we’re going to see many developments so brilliant that our minds can’t even conceive right now. And as long as the Bitcoin network becomes more decentralized and reaches its goal to separate money from human politics, I’m all for it.
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