Cryptocurrency Mining Evolves As Valuations Slump And Production Costs Soar

Concurrently the operational costs of mining have increased as Bitcoin, as well as other Proof of Work (PoW) coins, require escalating levels of mining power. According to Crypto News Review , "guestimates suggest that the price of Bitcoin needs to be sitting around the $4500-5000 mark for it to be profitable to mine, and then only if you have the scale of operations to make that work."

With BTC trading under $4000, a lot of digital currency-focused businesses are shrinking their work forces or closing altogether. It's been reported that Consensys, a major Ethereum development studio, is letting go of at least half its employees. And earlier this week, reports surfaced that Bitmain, which designs ASIIC chips for Bitcoin mining, has been hit by significant losses as the price of Bitcoin continues to collapse. It's rumored that the company will be laying off a significant portion of its workforce.

Is it possible that the increasing cost of mining will ultimately kill the asset class, or will players in the sector adapt? Xinshu Dong, CEO of Zilliqa says that during the cryptocurrency mining boom of 2017, Bitcoin’s hashrate—the computing speed necessary to generate a new block on the blockchain—skyrocketed, primarily as a result of the bullish market. The cost to mine one Bitcoin rose sharply as new investors entered the space, supporting full-scale mining farms which outfitted themselves with more and more mining equipment.

But as the value of Bitcoin slumped, smaller, standalone mining businesses were forced to give up mining entirely as their operations became less and less profitable. They also realized that they had over-invested in mining equipment, which without their intended utility, were essentially no better than scrap metal. Says Dong:

“When it comes to the pump and dump of hashrates, there are two main culprits. First, the winner-takes-all process in mining (whether for Bitcoin or Ethereum) which only rewards one miner for their efforts since only the proposer of the block (the hashrate leader at the time) profits. Additionally, when the blockchain relies on ongoing mining to ensure Sybil attack resistance and as a consensus mechanism to determine which proposed block should be the next truth of the network, the hashrate is susceptible to rapid increases.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Developers and miners of cryptocurrencies realized they had to consider alternate solutions to PoW in order to transition to a more eco-friendly and cost-effective framework. Says Dong, "projects need to seek solutions that address both culprits at once.”

”As the price of Proof-of-Work based cryptocurrencies has plummeted, the cost of mining (electricity and equipment) has become higher than the reward," says Mateusz Tilewski, CTO of Concordium Network . "We have seen examples where a single Bitcoin cost 25.000 kWh to mine—that's about as much electricity as a typical household uses in half a year.”

Tilewski points out that the current trend across the entire industry involves a shift from older Proof-of-Work approaches to newer Proof-of-Stake (PoS) models, where decisions are made based on one's ability to demonstrate ownership via the network. These protocols are much more energy efficient, enabling future cryptocurrencies to be both more cost-effective and by virtue of their energy efficiency, more eco-friendly.

Many projects have already been using clean energy sources. A report titled “The Bitcoin Mining Network ” estimates that 77.6% of Bitcoin mining now uses renewable energy, making it “greener than almost every other large-scale industry in the world.”

The execution of a more eco-friendly, cost effective form of mining is done in several phases, says Dong:

“First, we create a small Proof-of-Work (PoW) five-minute window for all mining nodes to submit their PoW solutions. Second, we take the first subset of those mining nodes that fulfill a certain global difficulty requirement to join as Directory Service Nodes or Shard Nodes.

Third, all nodes within each shard will go through a CPU-intensive consensus process, called practical Byzantine Fault Tolerance (pBFT) by signing off on the new truth (or block of transactions) to be submitted to the network. Fourth, the nodes that signed off the block will then split the block reward equally amongst themselves.

In so doing, the computationally intensive PoW isn’t relied upon as a consensus mechanism but only for Sybil attack prevention and to establish node identities, which leads to a less computationally-intensive and therefore, a more eco-friendly, cost-effective form of mining.”

The jury is still out on whether this evolution can invigorate Bitcoin. But EOS and NEO already use the PoS model. And Ethereum is planning to incorporate PoS into its Ethereum 2.0 update, scheduled for release in mid-January.

Written By: Investing.com