Babbitt Observation | Bubble soaring? It caused hard drive prices to soar, and Chia's valuation has exceeded 20 billion US dollars!

The popularity of cryptocurrencies such as Ethereum has kept the prices of high-end graphics cards at a very high level, which has caused dissatisfaction among gamers. Recently, hard drive prices have also begun to soar. What is going on?

The reason why hard disk prices are skyrocketing

According to Hong Kong technology publication HKEPC, the price of storage media has tripled as miners scramble to purchase hard drives in preparation for mining the Chia cryptocurrency.

Chia (XCH) is a cryptocurrency that can be mined using large-capacity storage devices. It will start trading at 10 a.m. Pacific Standard Time on May 3. As of now, some trading platforms have opened XCH IOU and futures trading pairs in advance, and the market price of XCH has been hyped to around $1,300.

Chia COO Gene Hoffman told Decrypt that the company did not expect the project to develop so quickly. He said:

“The growth rate in China is staggering, with miners from the region increasing from 10% to 40% of all miners on the network in about a week.”

Chia’s mainnet was launched last month. Instead of using the energy-intensive Proof-of-Work (PoW) consensus mechanism, it uses a “Proof-of-Space” consensus mechanism to mine XCH. In response, blockchain critic David Gerard warned:

“Mining space proves that cryptocurrencies may do to hard drives and SSDs what altcoins did to graphics cards.”

However, Hoffman said reports of a hard drive crisis were exaggerated and the shortages were likely temporary and limited to Southeast Asia, adding that despite China's extensive consumer electronics manufacturing industry, the region only produces about 20% of global hard drives.

In response to the demand for hard drives in the market, Chinese storage manufacturer Jiahe Jinwei announced that it will begin producing dedicated cryptocurrency mining SSDs, mainly targeting Chia miners. The company also announced that all its large-capacity storage devices have been sold out.

However, according to a visit to hard drive merchants in Zhongguancun by Times Finance reporters, the problem of hard drive shortage is not caused by market demand exceeding supply, but more because some agents are taking the opportunity to suppress and hoard goods in order to speculate and make profits.

About the consensus mechanism and Chia mining reward distribution mechanism

Regarding the Chia network project, the main concepts involved are the Proof of Space (PoS) and Proof of Time consensus algorithms.

The so-called Proof of Space (PoS), also known as Proof of Capacity (PoC) or Proof-of-storage, is actually not a new concept. The concept was formally defined by Dziembowski et al. in 2015. This consensus algorithm is very similar to Bitcoin’s Proof of Work (PoW), except that it uses storage instead of computing, and its visible benefit is energy saving.

It is not uncommon to see cryptocurrencies on the market that use this type of consensus algorithm. The most popular ones currently include Filecoin, Storj, etc.

In 2019, Chia published a "Green Paper" outlining the construction and design choices of its Proof of Space and Proof of Time. The process of reaching consensus in Chia is divided into two steps. After the Proof of Space stage, the best proof results will be broadcast to the network, and then the Proof of Time nodes will start processing them. Blocks verified by Proof of Time will be synchronized to the entire network. This combined PoST proof algorithm can effectively avoid malicious attacks such as rewrite attacks and DDoS.

Unlike Bitcoin Classic’s limited total supply design, the Chia project has chosen an unconventional issuance scheme. Its native token XCH has no upper limit, but instead chooses a predictable and continuous inflation alternative. In addition, the company has pre-mined 21 million XCH, which was revealed in the company’s recent business white paper. This has also caused dissatisfaction among many people. Based on the current XCH IOU market price of US$1,300, this pre-mined XCH portion has a sky-high valuation of US$27.3 billion.

After Chia Network launched its mainnet, mining of its native token XCH also began. According to the plan, its reward distribution will be halved every three years, with 64 XCH per block in the initial stage, as follows:

1. In the first three years, 64 XCH will be created every ten minutes; (a total of 10.09 million XCH)

2. From the 4th to the 6th year after the launch of the mainnet, 32 XCH will be created every 10 minutes; (a total of 5.04 million XCH)

3. From the 7th to the 9th year after the launch of the mainnet, 16 XCH will be created every 10 minutes; (a total of 2.52 million XCH)

4. From the 10th to the 12th year after the launch of the mainnet, 8 XCH will be created every 10 minutes; (a total of 1.26 million XCH)

5. 12 years after the launch of the mainnet, 4 XCH are created every 10 minutes; (210,000 XCH per year)

That is to say, in the first three years, the number of newly generated XCH coins per year is about 3.36 million, which will be halved every three years thereafter. After 12 years, the number of newly generated XCH coins per year will be fixed at about 210,000.

In 12 years, miners around the world have produced about 18.91 million XCH, which is less than the amount pre-mined by Chia, and the amount pre-mined by Chia is equivalent to the mining output of miners in 22 years. (In comparison, 20 years after Filecoin went online on the mainnet, about 70% of the tokens were allocated to miners, and only 30% were left to Protocol Labs and public and private investors)

Judging from this data, Chia is a bit more like a traditional corporate project rather than a decentralized protocol.

About the listing

It is reported that the Chia project has been in development for more than three years. It received $3 million in the seed round of financing in 2018. Since then, Chia has raised two rounds of financing totaling $28 million, including top investment institutions such as A16z. AngelList co-founder Naval Ravikant, one of the investors, even commented:

“I support Chia because I think Bram for a long time is one of the greatest protocol designers alive (BitTorrent), right up there with Satoshi and Vitalik.”

Obviously, the endorsement from top investment institutions and bigwigs has made the Chia project attract market attention from the very beginning.

In addition, although the “Proof of Space” mechanism aims to strengthen decentralization, Chia will not follow this goal. Instead, the company also plans to be listed on the US stock exchange. After the listing, investors can view Chia’s shares as Chia coin ETFs, and its pre-mined 21 million XCH will be the company’s main assets. In this regard, Hoffman added:

"Our plans to go public have not changed and we expect to submit and list our shares in the next six to 12 months, but we have to complete the listing first."

Judging from this plan, listing is only a plan of Chia, and the possibility of realization in the short term is not high. Even if the plan can be successfully realized in the end, it is doubtful whether the bull market of the entire crypto asset market can continue in 6-12 months. As part of this, the Chia project will naturally be greatly affected.

Are market valuations reasonable?

For crypto asset investors, valuing a project is very important and also the most troublesome issue. Judging from the 21 million XCH tokens pre-mined by Chia, the valuation of more than 20 billion US dollars obviously has a very large bubble component.

In comparison, the market value of the more than 67 million Filecoin tokens in circulation is approximately US$10.078 billion, which only accounts for 3.38% of the total Filecoin.

The problem is that, according to Chia, the 21 million pre-mined XCH will not be circulated in the early stages. That is to say, the market will speculate on the XCH tokens mined by miners. Based on the daily output of approximately 9,216 XCH, the circulation of early XCH tokens will be very scarce, which reminds people of the period when Zcash was first launched on the mainnet.

In addition, let’s compare the storage data of the current Chia network and the Filecoin network:

According to the data provided by chiaexplorer, the current mining storage space of the Chia network is 473.90 PiB, and the amount of XCH that can be mined per TiB per day is 0.02.

According to data provided by filscan, the current mining storage space of the Filecoin network is 4.48 EiB (approximately 4587 PiB), and the amount of Filecoin that can be mined per TiB per day is 0.0783 FIL.

In terms of mining scale, the current Filecoin network is about 10 times that of the Chia network, but in terms of mining revenue (calculated at current prices), the Chia network is about 2 times that of the Filecoin network. In other words, either the mining computing power of the Chia network will increase quickly, or its token price is overestimated relative to Filecoin.

In addition, although both the Chia network and the Filecoin network have plans for smart contract platforms, it is still difficult to compare the two.

In summary, with the popularity of the Chia project, in the short term the biggest beneficiaries may be the project owners, investment institutions, hard drive manufacturers and distributors. However, for ordinary investors, due to the insufficient duration of the crypto bull market and the problem of low circulation due to initial speculation, medium- and long-term holding may not be a good investment option.