Three major trends in Bitcoin mining innovation

Bitcoin has had its ups and downs in 2020, from the halving in May to the current surge in prices. Although the price of Bitcoin has surpassed 2017 and set a new high, observers remain cautious, fearing that this is another Bitcoin bubble. However, as the Bitcoin market matures and institutional investors become more interested in Bitcoin, Bitcoin supporters believe that this price increase is not just a speculative frenzy. In this optimistic mentality, people can only hope that history will not repeat itself this time.

Meanwhile, miner revenues reached pre-halving levels for the first time in November. Bitcoin has changed a lot since the genesis block. Mining on the Bitcoin network is no longer independent, but has become an astonishingly large-scale operation, spanning from remote provinces in China to Kazakhstan and even Malaysia.

This article is part of CoinDesk’s 2020 Year in Review, which includes columns, essays and interviews about cryptocurrency from the year. Nangeng “NG” Zhang is the founder, chairman and CEO of Canaan, a supercomputer solutions provider.

Despite rapid development, the emerging mining industry still faces an existential crisis. The existential crisis here is not just the sustainability of Bitcoin mining after the last block is mined in 2140.

Market development

China has long dominated the bitcoin mining industry due to its cheap electricity, low production costs and abundant labor resources. However, in recent years, the focus has begun to shift, mainly due to the emergence of mining pools in other parts of the world. Although China still holds more than two-thirds of the world's computing power, countries such as the United States, Russia and Kazakhstan have begun to catch up.

In order to carve out a new niche in the Bitcoin mining industry and help it flourish, these new competitors will need to consider many factors, such as competitive energy prices or alternative energy sources, attractive housing prices, and government support for digital assets.

For example, Kazakhstan has seen significant growth in Bitcoin mining activity, accounting for 6.17% of Bitcoin’s total hashrate, thanks to its support for the mining industry. This is largely due to the government’s tax policy support for cryptocurrency mining, which is only taxed when the mined cryptocurrency is converted into fiat currency. Then there is the legalization of mining, with the Kazakhstan Senate recently approving a bill that officially came into effect in early June. Lower electricity costs are just the icing on the cake.

This tax policy is indeed effective. It is expected that by the end of 2020, investment in local cryptocurrency mining operations will double, and another $738 million will be invested in the next three years.

Looking ahead to 2021, Bitcoin mining will continue to move in a positive direction and maintain its momentum. Over the past two years, markets have developed in the Commonwealth of Independent States (CIS), Europe, and North America. This trend will intensify as miners look to new regions to avoid regulatory crackdowns and pursue low-cost electricity.

In Europe and North America, plans for mining equipment may have been delayed due to the COVID-19 pandemic. However, as the Bitcoin market gradually recovers and the COVID-19 vaccine is expected to be available in 2021, we may see a rebound in mining demand. On the other hand, it is unclear what attitude the US government will take towards cryptocurrencies after Biden takes office.

Despite the emergence of new markets, China's position in the bitcoin mining industry will not be easily replaced. The Chinese government has called for faster development of blockchain technology and promoted cryptocurrency mining using renewable energy through financial incentives.

Technological innovation

Bitcoin mining has come a long way since the early days of CPU mining. From early innovations like GPUs and FPGAs to today’s mining rigs, miners are always looking for the fastest, most powerful, and most cost-effective machines.

The current competitive state of Bitcoin mining means that technological innovation needs to continue to keep up with the rapidly growing needs of the industry. Otherwise, miners will not be able to compete in equipment and will look elsewhere (using alternative energy sources or other forms of consensus protocols) to gain a competitive advantage and maximize profits.

Since the mining machine revolution, the technological progress of the Bitcoin mining industry has mainly focused on reducing chip size and increasing computing power to help miners improve mining efficiency. However, after each iteration, these improvements have stabilized. Although Bitcoin mining is the ultimate manifestation of PoW, people are skeptical about the long-term viability of PoW. Ethereum 2.0's PoS consensus can be said to be a more sustainable and environmentally friendly model.

When talking about the next technological innovation, many people mention quantum computing. Quantum technology is hailed as the next frontier in computing and has the potential to undermine the security of Bitcoin and make Bitcoin's cryptographic keys insecure. Once this happens, it is possible to have a soft fork that allows the Bitcoin protocol to run on a quantum-resistant algorithm or even nodes running on quantum computers.

However, quantum computing is still in its early stages. Mining machines will still be the cornerstone of Bitcoin mining until 2021. I believe Bitcoin miners will have to wait a few more years before the next breakthrough technology arrives.

Long-term sustainability

As mining machines become more powerful, power consumption will also increase.

Historically, China’s regions such as Xinjiang and Inner Mongolia have relied on coal to provide mining companies with lower energy prices. China is looking to tackle pollution more broadly, recently announcing it will achieve carbon neutrality by 2060 through a “green revolution.” This means that mining using non-renewable resources such as coal will become less and less cost-effective for Chinese miners.

In addition, Bitcoin miners have been relying on cheap electricity from hydroelectric power plants in Sichuan Province as a renewable energy source. However, China’s hydroelectricity is only available during the flood season (6 months). It is no wonder that Bitcoin miners are turning their attention to more regions to seek renewable energy and surplus energy.

As 2020 draws to a close, the future looks bright for Bitcoin mining. Just as we recovered from the last Bitcoin bubble, 2021 looks even brighter as the fourth industrial revolution arrives.

In reshaping a sustainable mining ecosystem, we would do well to engage in long-term strategic planning, not just considering short-term effects (in terms of technology or profits), but focusing on the full integration of business, sustainability, and environmental goals.