Revealing the secrets of Chia mining: Is “green Bitcoin” just speculating on hard drives?

Author: Deep Chain 66

Chia mining has become so popular recently that it is confusing.

“BitTorrent founder is in charge, A16Z and Coinbase participate in the investment, the entry threshold is very low, and the return on investment is about 20 days.”

"There is a shortage of hard drives right now, so those who want to get in should hurry up, because buying now is a good deal."

"1P is only 450,000. There are too many customers. You have to queue up for P. Come early and get rich early."

With the launch of the Chia mainnet, similar promotional copy has spread in WeChat Moments and communities.

It doesn’t matter if you don’t understand what Chia is yet. Let’s take a look at the market’s popularity: the price of the currency has soared, and the over-the-counter price of XCH has risen from US$30 per coin to US$120; the price of mining machines has risen, from 200,000/P to 400,000/P; hard drives have been hyped up, and the price has skyrocketed...

What is Chia? Is hard drive mining really reliable?

"What exactly is Chia?"

If you don’t read the official description, it’s easy to confuse Chia with Filecoin and regard it as a new project in the storage sector.

The vision of Chia in the white paper is clear - to improve the global financial and payment system. In other words, what Chia does is not storage, but payment.

Chia is a project launched in August 2017, and its founder is Bram Cohen, the founder of BitTorrent. At that time, BitTorrent had not yet been acquired by TRON, and Bram Cohen probably had not even heard of Justin Sun's name.

At the end of 2016, Bitcoin soared from around US$800 to around US$5,000 in 2017, and the growth has become increasingly fierce.

Bitcoin mining has gradually become popular, and miners have flocked into the market. At that time, statistics showed that the electricity consumption caused by mining reached 1 billion kilowatt-hours, which exceeded the total electricity consumption of 159 countries in the world.

In Bram Cohen's view, the electricity consumption caused by Bitcoin mining is not conducive to environmental protection, so he proposed the concept of "green mining". With this concept, Chia has gained the favor of capital in the environment of Bitcoin's crazy rise and ICO's crazy.

Chia received two rounds of financing in 2017 and 2018. Investors include well-known Wall Street institutions such as A16Z, Danhua Capital, and DCM Ventures. It is worth noting that Coinbase, which recently listed on the Nasdaq, is also one of Chia's shareholders.

Strictly speaking, Chia cannot be called "mining". The white paper calls the process in which players participate "farming".

Of course, this farming concept is also different from the farming concept in the DeFi field.

Different from Bitcoin's POW mechanism and EOS's DPOS mechanism, Chia adopts a dual proof mechanism of time proof + space proof (POST).

Chia's "farming" refers to "hard drive mining".

With the launch of the Chia mainnet on March 19 this year, those who participated early have begun to receive Chia's block reward XCH.

Currently, 100T of computing power (hard disk) can produce about 2 XCH per day.

In the early days, 100T computing power could produce 3 to 4 XCH per day. Based on the XCH OTC price of $30 at the time, the daily profit was about $90 to $120, while the cost per T was only $25. In other words, it only took about 20 days to recover the cost.

"XCH at $30 is a thing of the past." Chia miner Zhijie told Deepchain Finance, "Now in Shenzhen, all prices are $100, and the highest price has been $120."

If calculated based on a unit price of $100, the current payback period for mining will be shortened to about 7 days.

From this perspective, compared with Bitcoin, Ethereum, and Filecoin mining, which currently take 3 months to 1 year to pay back, Chia is still quite attractive.

What’s more, there are currently two small exchanges that have launched XCH futures products. On one of the exchanges, XCH reached $5,000 when it was first launched, while the XCH futures on another exchange soared directly to $10,000.

Based on this price, mining can pay off in one day.

But is this really the case?

In the process of communicating with many Chia miners, DeepChain Finance found that although Chia is advertised as glamorous on the surface, there are many pitfalls, and the threshold for participation is far from as low as advertised.

"The P-disk link that is difficult to bypass"

The first pitfall of Chia mining is P disk.

Before that, let’s take a look at the specific method of Chia mining:

Bitcoin mining can be seen as the network randomly generating a very difficult mathematical problem, which is then calculated by each miner using computing power. Whoever gets the answer first and verifies it is correct will receive the block reward.

Chia's Farming model does not require miners to perform difficult mathematical calculations.

Just like farming, Chia requires "farmers" to store various difficult mathematical problems on their hard drives, and then submit them to the Chia main network for verification. If the verification is successful, they can get block rewards.

It can be understood as buying lottery tickets. The more lottery tickets you buy, the greater your chance of winning.

The process of storing difficult math problems is the P drive we commonly see.

Generally speaking, the faster the P disk speed and the larger the hard disk capacity, the greater the chance of winning.

Therefore, if you want to participate in Chia mining, the first thing you need to do is to fill your hard drive with hash data.

"At present, whether it is a mining pool or cloud computing power on the market, the publicly announced P-disk cycle is about 30 to 60 days." Lbank founder He Wei told DeepChain Finance that the former just launched the Chia mining machine sales business a month ago.

In addition, when retail investors consult Chia mining machine sellers, the other party will often inform them of an installation time in addition to the P-disk time, and this time is generally around 10 to 15 days.

That is to say, after a user purchases a Chia mining machine, the earliest they can start mining at full capacity is 40 days later.

It is also worth noting that if miners want to participate in Chia mining more professionally, they will also need to use RAID: redundant disk array technology.

Simply put, RAID is a technology that combines multiple independent hard disks (physical hard disks) in different ways to form a hard disk group (logical hard disk), thereby providing higher storage performance and data redundancy than a single hard disk.

Since the principle of RAID is to combine multiple hard disks into a larger and faster hard disk through a RAID controller, when miners use RAID technology to P disks, as long as any one of the hard disks has a problem, it may cause data loss in the entire array.

The loss of data on the entire array is known as a P disk failure.

The current miners will not tell you this information in their promotional materials. But as a mining machine buyer, you should be more careful.

"The price of hard disk changes every day"

Even if the technical problem of P disk is solved, there is still a more difficult problem facing miners - they cannot buy hard disks.

Just as the $30 XCH is a thing of the past, the $40 per terabyte cost of a hard drive is also a thing of the past.

The continuous rise in the over-the-counter price of XCH has triggered a huge demand for hard drives among miners.

Taking Western Digital's 10T mechanical hard drive as an example, its current selling price on Taobao is 3,999 yuan, and the cost per TB is as high as 60 US dollars. The cost per TB of Seagate's 10T mechanical hard drive is as high as 75 US dollars.

A month ago, the lowest price of a 10TB hard drive was only about 1,100 yuan. In less than a month, the price of hard drives has risen by more than 3 times.

This is just a mechanical hard drive. If a solid-state drive is used, the cost per TB will be sky-high. The cost of a 1TB Western Digital solid-state drive is around US$180.

The ever-increasing hard disk costs not only increase miners’ investment, but also extend their payback period.

“In fact, even if the price of hard disks rises and the payback period is extended, it is still more cost-effective than mining Ethereum or Filecoin.” Zhijie told Deepchain Finance, “The problem is that hard disks are hard to buy. Currently in Shenzhen, hard disk orders have been postponed to after May.”

Just as the rising price of Ethereum has made graphics cards hard to come by, the hard drive market is currently facing such an embarrassing situation.

“The price of hard drives changes every day. If you ask for the price on the same day and don’t place an order immediately, you won’t be able to buy it the next day.” Millions of miners, who previously served as underwriters for Chia mining machines, have now suspended the sales of mining machines because they are unable to buy hard drives.

"In fact, the popularity of Chia in China has only started in recent months." Wu Kefang, a representative of a domestic storage mining machine partner and known as "Sister Xingfan", told Deepchain Finance, "Since the birth of Chia, it has basically been foreign players who have been actively deploying."

According to the Chia official browser, the current effective storage computing power of the entire Chia network is about 495PiB.

"Among them, China's computing power is about 100PiB, and much of it is new computing power." Wu Kefang told Deepchain Finance, "Chinese players, including us, have paid attention to Chia as early as this year's Spring Festival."

However, FIL, the leader in the distributed storage field, was not very popular at the time, so the industry did not show much interest in a project like Chia that had not even launched its main network.

Until March 19 this year, when the Chia mainnet was launched, FIL soared to a high of $237, and CRU reached $180. Some people suddenly looked back and focused their attention on Chia, which has its own halo.

“Of course, in this process, it is not ruled out that big funds will use the bull market and storage sector to hype Chia and profit from it.”

In Wu Kefang's view, this is all understandable. Whenever any sector of the blockchain industry becomes hot, speculative funds will emerge.

"Who is behind this?"

What really affects Chia mining are the hard drive monopolists who come here to smell the smell.

This view was also recognized by He Wei. "For some hard drives we ordered before, the agreements were completed and the payment was made, but many of them are stuck in the warehouse. The manufacturers do not allow channel dealers to ship them."

In He Wei's opinion, this order came from the general agent of Western Digital and Seagate.

It is undeniable that as the over-the-counter valuation of XCH goes up, the demand for hard drives in the market is gradually increasing. Some hard drive sellers choose to raise prices or interrupt supply to wait for the price to rise, forcing miners and miners to spend more money to buy hard drives.

Generally speaking, the profit margin of a hard drive is around 15%. That is, for a hard drive with a market price of 1,000 yuan, after deducting the cost, a source manufacturer like Seagate can probably get a return of around 150 yuan, while the profit margin of the middle channel dealer is around 30%, or around 300 yuan.

As the market price of hard disks continues to rise, the profits of both hard disk manufacturers and channel dealers have increased by 2-3 times compared with the past.

The huge profit margin in hard drive sales and the expected rise in XCH coin prices have put hard drive manufacturers and miners in opposition.

"This is a game," Baiwan told Deepchain Finance, "a game between hard drive monopolists and various miners."

Let’s see who can’t hold it anymore first.

Wu Ke Fang believes that after XCH opens normal trading in May, the price of XCH will gradually return to a rational position. Due to the positive correlation between the currency price and mining machines, the price of mining machines will also return to rationality.

In fact, the long-term pressure of inventory has made some hard drive hoarders feel overwhelmed, and some hard drive hoarders have begun to sell their hard drives at a discount because they could not bear the pressure.

According to China News Service, a hard drive hoarder once stockpiled 700 16T hard drives of a certain brand at a price of 4,550 yuan, but now they are discounted to 4,200 yuan but not a single one can be sold.

"Monopoly also comes at a price. Holding so many hard drives in their hands greatly reduces the liquidity of their cash flow." Baiwan told Shenlian Finance, "If they hold on to them and don't sell them, they are worthless."

“Will “Green Bitcoin” be recognized?”

Although the hard disk monopoly phenomenon has improved, the phenomenon of hard disk hoarding in the market still exists, and it is still difficult for miners to buy hard disks at reasonable prices.

On one side are the hard drives in short supply, and on the other side are the buyers of mining machines who are crying out for food. Therefore, some unscrupulous miners choose to use second-hand hard drives as good ones.

"Generally speaking, every hard drive has the possibility of P disk failure." He Wei told Deepchain Finance, "but the probability of failure of a second-hand hard drive is more than 100 times higher than that of a new hard drive."

Using second-hand hard drives as genuine ones is a pitfall that is difficult for users to identify when participating in Chia mining.

A Xianyu seller told Shenlian Finance that a second-hand 8T Seagate mechanical hard drive costs about 60 yuan per TB, and this is the retail price. If purchased in large quantities, the cost can be reduced to 40 yuan per TB.

Some unscrupulous miners use false propaganda to package second-hand hard drives as first-hand ones and sell them at a price of 400 yuan/T. The total profit margin is as high as 10 times.

"In fact, second-hand hard drives passing off as first-hand ones are just the tip of the iceberg in the chaos of Chia mining machine sales." Xingchen, operations director of the mining circle computing power service platform Computing Power 360, told Deepchain Finance, "The mining machines purchased online may not be anchored by physical mining machines, which is also very likely to happen."

It is worth noting that industry insiders have revealed that some miners now claim that Chia mining machines require 48-core or 128-core CPUs, but in fact, the most important thing for Chia is the hard disk. The mining machine only needs a PC with the same configuration as a Raspberry Pi with 1-2 cores (worth about 250 yuan).

In addition, there is an increase in mining difficulty.

As Chia becomes more and more popular, more and more miners choose to join the ranks of Chia mining.

According to Chia's official statement, the number of XCH blocks is certain within a certain period of time, but as more and more nodes participate in mining and the computing power increases, the number of XCH tokens that each person and each mining machine can get will continue to decrease.

In the latest promotional posters of some miners, the number of blocks mined per day per T has been reduced from 0.04XCH to 0.02XCH.

And this is the mining efficiency under the premise that there is no large-scale entry of domestic computing power.

In the future, as the hard disk problem is solved and more and more large mining farms enter the market, the return on mining per mining machine will further decline.

"In addition, there is another issue that deserves attention, which is the Chia team's default on delivery." Xingchen believes that although there is no evidence to prove it, this possibility cannot be ruled out.

Even if the above problems are not a problem, the development prospects of the Chia project itself still need to be marked with a big question mark.

After all, this is an old project that was born in 2017. The concepts of "green bitcoin" and "global payment" may have been novel at the time and were favored by investors. But after several years of ups and downs, in the current hot topics, even if it can catch the "carbon neutrality" hot spot, how much recognition can Chia gain?

An interesting phenomenon is that before the launch of the Filecoin mainnet, in addition to the crazy publicity of mining machine manufacturers, many exchanges also launched FIL futures.

As for Chia at the moment, apart from the loud voices of mining machine manufacturers, all exchanges, big and small, seem to be in a state of wait-and-see and suspicion, without much action.

The coins produced by Chia mining will eventually need to be taken over by people who buy them in the secondary market. Will exchanges and investors in the secondary market buy into this story of “green Bitcoin” that has been told since 2017?