The Economics of Crypto Mining

Published on
October 13th, 2020
Duration
54 minutes


The Economics of Crypto Mining

The Interview - Crypto ·
Featuring JohnPaul Baric and Santiago Velez

Published on: October 13th, 2020 • Duration: 54 minutes

JohnPaul Baric, CEO of the Mining Store, joins Santiago Velez to discuss crypto mining and its impact on tangential markets. Baric describes how he first learned of Bitcoin while he was still in high school and how he turned his deep interest into a career. He explains in detail the changing economic dynamics of crypto mining, its hardware, and how he's used his knowledge to capitalize on these changes. Baric touches on Ethereum mining with GPUS and the differences between that and Bitcoin ASIC mining. He ends the discussion explaining what crypto "forks" are and a brief explanation of mining pools. Filmed on October 06, 2020

Comments

  • LK
    L K.
    21 October 2020 @ 14:09
    I echo all the comments praising this interview. The questions were excellent and depth of knowledge in the answers was amazing. The economics and risks of mining are fascinating. There was tons of interesting information, which has provoked a few more questions in my mind. Perhaps someone more knowledgeable can answer: 1. Is there some intrinsic property of intrgrated circuit design that prevents memory being added to ASICs - doesn't Moore's law create a barrier to ASIC-resistance of this type? My understanding is that Litecoin's Script Monero's Cryptonight algorithm were also designed to be memory-hard, but as mentioned ASICs were created for those coins. The current Monero algo, RandomX, was designed to utilize all aspects of a CPU, I believe, which makes ASIC development economically nonviable. I don't think they have changed the protocol in the last couple of years to fork off ASICs, and AMD Ryzen CPUs have been the dominant mining hardware (even better than GPUs). 2. Following on, what level of performance advantage over commodity hardware would be required to make economically viable ASICS? Presumably manufacturers could recoup some development costs by mining with their ASICs until difficulty adjusts upwards to a certain level before selling their hardware to customers. That was certainly alleged by developers of coins who have forked off ASICs. 3. There's been a lot of hype on RV and elsewhere about Ethereum 2.0, which will involve a switch from PoW to PoS. But Jean-Paul mentioned that Ethereum will not change their protocol. How will this work? Isn't a the main marketing claim about PoS that it does not require energy-consuming mining (an argument Jean-Paul did a very good job of refuting, IMO)? If my understanding is correct and Jean-Paul misspoke, how will Ethereum miners react to their revenue stream being cut off? Is there a chance of a chain split due to miners continuing to mine the old chain when the new chain moves to PoS, or will it be more advantageous just to deploy their hash rate on other GPU-mineable coins?
    • SV
      Santiago V. | Contributor
      21 October 2020 @ 15:58
      Oh boy, you are opening up a can of worms! Your questions are next-level and insightful, please give me time to prepare appropriate responses because they are deserved. Maybe we should make this the topic of our next interview, what do you think?
    • LK
      L K.
      21 October 2020 @ 17:48
      That would be amazing. Thanks for responding.
  • MR
    Michael R.
    13 October 2020 @ 18:21
    Very interesting interview. A real shame there was no discussion as to what JohnPaul thinks happens to the mining industry when few and fewer coins will be released as rewards? How does this affect the integrity of the blockchain? Also if there are hashrate derivative markets whats to stop someone in the future cornering that market and causing security issues in the underlying blockchain?
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:19
      I will follow up with JP, but here is my view on it. First, a few points of distinction, not all Proof-of-Work monetary systems are the same. In the case of Bitcoin mining specifically I think what you are referring to is the "halving" in which the block reward is programmatically cut in half after a certain number of epochs (block amendments). This obviously has a consequence on the revenue side for miners. The ultimate consequence is really a confluence of the underlying bitcoin price, the miner electrical costs, the ASIC costs, and network difficulty before/after the halving. Miners that are efficient and already strategically positioned for this forecasted event will acquire market share while less efficient operators end up capitulating and get liquidated (with ASIC / hash power redistributed into the marketplace). This can lead to industry consolidation around mining pools and hash operators which is a concern for 51% attacks. Derivative markets do not ensure that market participants can't corner the market, particularly in this unregulated market. The underlying security issue you are referring to is ultimately a double-spend event lead by a 51%+ attack (miners that use their majority hashing power to spend an amount of Bitcoin twice by essentially temporarily re-writing some ledger history. This is an edge case scenario that at this point would cause more brand impact than monetary. The only entities remaining that could coordinate this would be either mining pools aggregating against their individual long term interests or by nation states that view the ecosystem as a threat to sovereign monetary policy or capital controls. Neither are impossible but highly unlikely. The network could persist, like in the case of Ethereum classic that has been attacked 4 times successfully with a 51% attack but still persists today. If this were to happen to Bitcoin it would simply set the moving back for a few years while investors / developers remediate the flaws and then restore liquidity to the system.
    • ji
      jayanth i.
      15 October 2020 @ 05:45
      Santiago, thanks for the detailed explanation on the 51% attack probably; how bad would the damage be and can you ellaborate on what you mean by ''If this were to happen to Bitcoin it would simply set the moving back for a few years while investors / developers remediate the flaws and then restore liquidity to the system.''
    • SV
      Santiago V. | Contributor
      15 October 2020 @ 18:24
      @jayanth Yes, there was a typo in my statement, "moving" = "movement", because that's how I view the growth of this space, a movement towards decentralization, disintermediation, and disruption of incumbents. Traditional financial institutions provide a valuable set of services to society by assessing risk and/or allocating capital on behalf of savers / investors. The problem is that this responsibility has been handled poorly and in some cases leads to systemic risk, but I think I would be preaching to the choir here by saying that. With regards to Bitcoin, the movement I refer to specifically is the optionality of a supra-national settlement / collateral system which can store value over time without relying on the monetary policy choices of sovereign governments. The value of the ecosystem is therefore a network effect value from the consensus of the governed that the value is redeemable for other things of value (fiat or property). Bitcoin therefore acts as a "check out" system, or a vote of no-confidence in existing fiat systems. That being said, it is not intrinsically valuable (like food, water, clothing, etc.) as I define it, it's value by agreement. If you accept this premise, that consensus can be shattered (even temporarily) by anything that represents even the possibility of systemic shock. A 51% attack represents a systemic shock but because of the design of the protocol doesn't necessarily mean an ecosystem collapse. In summary, an attack would simply shake the confidence of the governed for a period of time for many participants until the realization set in that the attack does not mean the end but rather a learning opportunity for ameliorating the vulnerabilities of the system. This process takes time, confidence needs to be rebuilt, and liquidity would start to flow back into the system. It's the HODLers, development community, and miners that would have to "hold the line" while this process unfolds and because we are human, that would take time. Did this answer your question?
    • ji
      jayanth i.
      18 October 2020 @ 09:10
      thanks mate, that was an incredibly thorough explanation and I'm sure all RV subscribers would be loving the amount of time your taking to answer questions in the comment section, It really helps beginners cement ideas :)
  • JB
    Jack B.
    16 October 2020 @ 23:23
    I really appreciate the interplay of Santiago and John Paul realizing that their intercourse is an educational lecture disguised as a conversation.
    • SV
      Santiago V. | Contributor
      17 October 2020 @ 05:07
      I think I like this comment, but I'm mildly suspicious. 😆
  • MS
    Marius S.
    16 October 2020 @ 12:50
    Many thanks to both gentleman for a very insightful discussion. @Santiago, thank you for taking a step back to "translate" a lot of the content and investing the time for comments here. Brilliant!
    • SV
      Santiago V. | Contributor
      17 October 2020 @ 05:04
      My pleasure Marius!
  • PR
    Private R.
    16 October 2020 @ 19:03
    Great stuff, this side to bitcoin is not highlighted enough - fascinating discussion.
  • TS
    Thomas S.
    15 October 2020 @ 13:49
    Great interview ... loads of good information and food for thought. Thank you. Wanted to follow-up on mining overall and the comment towards the end about some miners being content getting their reward and making some money. From the information I gleaned from financial reports of the publicly-traded "larger" bitcoin mining companies (Hut, Riot, Marathon, etc.), they don't seem to be making that much money and/or to be consistently profitable. It almost seems like a "race to the bottom" in that you constantly have to get bigger (more hash power), faster (newest mining machines) and cheaper (lower energy, op costs, etc.). And, as mentioned during the video, this brings with it the need for more and more capital investment. These reports also mention that the existing equipment is becoming economically obsolete across shorter time periods (which brings the question of who is buying this equipment and putting it into service after it has been "discarded" by a much larger miner ?). Perhaps a smaller player can join a mining pool which may help somewhat but if I understand how they work and how they compensate participants, I may be missing something. If I am in a pool that represents 10% of hash power for the BTC network, on average presumably, that pool would "win" 10% of the rewards. I suspect that the rewards are in turn shared across the pool based on the underlying hash power each individual represents. Is my relative network hash power percentage different than if I was standalone ? Now, maybe the pool gives access to other revenue streams like the derivative hash power trading etc.; however, this must be offset somewhat by the pool membership/other fee(s) I pay. In any case, significantly increasing BTC prices would make lots of these problems moot ... but rising prices also attracts more competition, which starts the race all over again. Also, it would be interesting to find out from JP what the power producers are requiring as credit backstops from a crypto miners. These can get costly and eat away at profits. If insurance companies are charging higher premiums and/or avoiding writing coverages, I've got to believe that power providers are demanding letters of credit or cash deposits, etc. Thanks again ... sorry for the long-winded post.
    • SV
      Santiago V. | Contributor
      15 October 2020 @ 19:08
      I like long winded posts! Your insights are spot on. The mining industry is absolutely a race to the bottom, it's algorithmically savage in it's competitiveness, and that's a good thing. Only the fittest at managing capital will survive the competition and as you pointed out materials and energy are at the root of that process. With respect to cash balances on mining operations what's not reflected are Bitcoins that have not been liquidated. Many of these operators operate under the principle that Bitcoin value in relative terms to fiat is accelerating according the Stock-to-Flow model, and therefore is non-linear. Ultimately this means that they do everything they can to not liquidate any Bitcoin and instead use it as collateral to maintain cash flow with lending products. The two rates, inflation of fiat vs. appreciation of Bitcoin can turn out to be beneficial for the savvy miner that learns how to arbitrage these rates. With regards to price appreciation impacting hashing power, that was addressed in the talk. Price always preceeds hashing power because the price is impacted by non-mining factors, like speculation, M&As, announcements, etc. The economics then appear favorable to mining but under the premise that the existing difficulty rate won't adjust. This means amateurs jump into the market but without a sustainable plan for when the price either corrects or the hashing power rises and yields drop. It's an incredibly interesting dynamic that will play itself out as the network and value of bitcoing grow. This effect is similar, but not identical, with other Proof-of-Work ecosystems and even other forms of compute up the stack. Each ecosystem has it's underlying tokenomic structures that inform the view of the investor and the deployer of capital. I'll ask JP about power provider credit backstops but I can share some tidbits from my own discussions with power producers. Many have been burned. There are power producers that try and address the volatility or depressed pricing of the energy markets with bitcoin mining only to find themselves paired up with an immature mining operator. In some cases they've even had stranded assets at the plant which were abandoned without consideration for disposal. It's an immature business yet but maturity is entering the space with operators like JP that have been through this cycle several times and have survived. Great comments and questions, thank you!
  • SV
    Santiago V. | Contributor
    13 October 2020 @ 14:36
    I really enjoyed this interview. JohnPaul and I barely touched the surface and I look forward to getting him back on again to touch on specific areas in detail. Please feel free to ask questions and I will do my best to get the answers.
    • JW
      J W.
      13 October 2020 @ 16:02
      Excellent interview. I would like him to dive deeper into the future of the Mining industry, discuss more business models and talk about some of the creative ways Miners are positioning themselves to energy producers. Also to talk about how Miners will respond to a future where transaction fees are becoming more predominant as a revenue stream due to the scarcity and finality of the amount of available Bitcoin.
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:10
      You got it J W. On the agenda for next time.
  • TR
    Theodore R.
    14 October 2020 @ 02:22
    Thank you both. Great job. An encyclopedia in a video format. Could only follow ~50% of what was presented but really interesting. Santiago, may I request, going forward and considering your deep understanding of the crypto and the real world and your high intellect, that you try to translate as many terms as possible to the language people like myself can understand... for me ASICS are running shoes... Thanks again gentlemen.
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:09
      YES SIR! Will do. I take nomenclature and vernacular for granted because I've been down the rabbit hole for so long I forget what it was like. Please ask questions and we will augment the discussion herein. I appreciate the feedback.
  • MH
    Muddshir H.
    14 October 2020 @ 03:52
    Great as always
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:08
      Thank you!
  • SM
    Shawn M.
    14 October 2020 @ 04:36
    POW over POS seems to be the issue I have these days. The real question is Quantum computing . Vitalic seems to address this recently and I say recently 6 months ago things are moving so fast in this space that it is making everyone's head spin. Lex Fridman's interview on March 16th, 2020 with Vtalik left me a few or more than a few questions as to all other POS coins being able to maintain Decentralization in the definition.
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:07
      Agreed, the pace of change is breathtaking and exciting. I do my best to stay ahead of it and bring that knowledge to the viewers.
  • Sv
    Sid v.
    14 October 2020 @ 17:29
    This is like listening to a lecture in Latin. I can only grasp about 40% of what is being discussed. I need a "bit coin mining for dummies."
    • SV
      Santiago V. | Contributor
      14 October 2020 @ 20:07
      LOL! I hear you! Please feel free to ask whatever questions you'd like and I'll do my best to answer or redirect.
  • JH
    Joseph H.
    13 October 2020 @ 20:32
    Very interesting, thank you both.
  • PG
    Peggy G.
    13 October 2020 @ 17:40
    Fantastic interview especially the energy source and explanation on this direction and how the cost factors are for energy on how Bitcoin is consumed in the US where the power companies negotiate these cost factors to the miners and where the US gains. I hope RV allows you Santiago to host another interview with JohnPaul and dive deeper into this power sourcing and is there views to see what the market holds globally with this power source to drive the miners where countries can work together in these markets with more power sourcing? BIG State of Texas says TY
  • JW
    J W.
    13 October 2020 @ 10:59
    The mining industry is fascinating to me. Apart from the tech, the economics are being developed on more and more really innovative uses of obtaining cheap energy. Companies are developing mining pods which you can attach to anything with surplus energy from the primary business activity - for example, natural gas from oil fields or surplus energy from the local grid, power companies looking to monetize wasted energy or any company that burns things in earnest :-) . I would not mind having more interviews like this on RV.
  • sc
    steve c.
    13 October 2020 @ 08:31
    Great interview!
  • PB
    Pieter B.
    13 October 2020 @ 07:06
    Truly fascinating! Thanks a lot!