The mining industry faces policy risks. Where is its future heading?

1. Government’s attitude towards the mining industry

A few days ago, I saw news that the Sichuan Provincial Government had begun to "guide mining companies to gradually withdraw," which was interpreted by the media as the beginning of a new round of government regulation of the mining industry.

The government's attitude towards Bitcoin and other digital currency mining has changed several times, and it can even be said that it has been repeated, sometimes tight and sometimes loose.

From the initial complete ban on digital currency-related businesses, to the later recognition of Bitcoin as virtual property, to the national special rectification of Internet financial risks requiring mines to exit in an orderly manner, listing virtual currency mining as an eliminated industry, and then to the national level beginning to encourage the development of the blockchain industry and then relaxing for a period of time, to the recent news of the Sichuan Provincial Government guiding mining companies to exit.

Why does the government have such a fluctuating attitude towards the mining industry? What is the future policy direction of the mining industry? I think it is necessary to talk about it specifically.

Let me just state my opinion first: In the long run, it is unlikely that the country will support the development of the digital currency mining industry. If the supervision over it can be relaxed, it would be considered as a lenient move , and practitioners in the mining industry should be mentally prepared for this.

Bitcoin is positioned as a digital currency, which is in direct competition with the central bank's legal tender. The more Bitcoin grows, the more it will be involved in money laundering and capital outflow, which will cause great trouble for government supervision. It is for this reason that the country's attitude towards Bitcoin must be negative, which is certain; but at the same time, the government has no effective way to completely ban it, so it can only restrict its development on the one hand, acknowledge its existence on the other hand, and try to reduce its influence.

From another perspective, environmental protection is a new focus of the government's work. In the eyes of the government and some people, Bitcoin mining is a seriously polluting and wasteful industry. They believe that mining is completely meaningless work. Although we don't think so, it is difficult for us to convince them, so their restrictions on Bitcoin mining will be long-term.

2. The development direction of blockchain projects under the background of restricting mining

1. Some blockchain projects cannot do without mining

The country restricts mining from a national perspective, but from the perspective of the development of blockchain projects, some projects cannot do without mining.

First of all, Bitcoin is definitely inseparable from mining and proof of work. This is the fundamental difference between Bitcoin and previous electronic cash, needless to say.

In addition to Bitcoin, there are a few blockchain projects that are also inseparable from mining. Which projects are they? I mentioned in my previous article "Is the Proof of Work Mechanism Essential?" that all projects involving direct peer-to-peer transactions ultimately cannot do without proof of work, that is, mining.

There was a famous article called "The Minimum Viability Principle of Blockchain" which you can search for and read. It is very well written. Through a series of logical relationships, the article proves that the blockchain behind Bitcoin is the minimum viability principle. All projects that want to achieve direct peer-to-peer transactions will inevitably adopt this architecture.

Point-to-point transactions are the most direct transactions, with the lowest cost, the least constraints, and the highest efficiency. They are truly market-oriented transactions, and there are many such needs in real life. Wherever there is no strong centralized institution, wherever there is cooperation between multiple untrusted parties, information opacity, and a long process chain, there is a strong demand for such direct point-to-point transactions. As long as there is such a demand, proof of work and mining are required.

2. There won’t be too many projects that require mining, and there will be fewer new POW consensus projects.

On the one hand, a few blockchain projects cannot do without proof of work and mining. On the other hand, the country restricts mining, which will result in not too many mining projects. A large number of new projects will choose other consensus mechanisms such as POS and DPOS.

Moreover, as I said before, there is not a need for many public chain projects to adopt POW . If a large number of public chain projects adopt POW, it will indeed cause unnecessary waste.

Moreover, from an ecological perspective, under a specific algorithm, basically only one chain will thrive. If the algorithms of several chains are the same, there will be endless computing power wars between them until one side adds various protection measures.

Although blockchain cannot do without POW, it does not mean that all blockchain projects need POW. Only industries related to value transfer, currency, and assets, and industries with high requirements for security and decentralization, cannot do without POW. Most blockchain projects are just issuing tokens and do not need POW. They only need to use the existing POW public chain to issue tokens and run smart contracts.

In addition, POS itself has many advantages. It is closest to the equity model in current traditional finance, and is easy for the public to understand. It is also environmentally friendly, efficient, has fast transfer times, low fees, and many other advantages. DPOS is also environmentally friendly and efficient. For most blockchain projects, there is no need for mining at all, and POS and DPOS can solve the problem.

3. The pure mining model will become a compound model of "computing + mining"

The country has always supported cloud computing, artificial intelligence and other fields, and has included them in the "new infrastructure", but does not support the mining of digital currencies such as Bitcoin. So if we make some adjustments to the mining algorithm so that the mining process itself is part of artificial intelligence and computing, can it play a role in avoiding policy risks? For example, the design of my consensus mechanism is not based on mining, but on computing, that is, the main business is used for computing, and mining can only be an additional effect.

In fact, in real life, many companies are mining under the guise of "big data" and "cloud computing". The reason why it is called a guise is that Bitcoin mining uses a general algorithm. This computing power can basically only be used for mining and cannot be used to make other social contributions. It is not "computing" in the true sense.

However, if mining turns to dedicated algorithms in the future, things will be different. In the past, it was "fake computing, real mining". In the future, when dedicated algorithms are available, professional algorithms may be combined with a certain part of artificial intelligence, which will become a "mainly computing, and mining by the way" model. At this time, the computing process required by the blockchain is the real "big data" and "cloud computing", which can not only circumvent government supervision, but also get government support.

I think this will be the trend in the future: the POW consensus mechanism will change from being completely based on mining to being mainly based on computing and supplemented by mining; general algorithms will gradually fade away, and special algorithms will gradually rise; edge computing and other computing methods that are more closely linked to reality will gradually become mainstream.

Of course, when this new mining model is widely used, it will also cause some new problems. For example, if computing is the main method and mining is secondary, then it may mean that the income from computing may exceed the income from mining, which is a big impact on the economic ecology of projects that adopt the workload mechanism. Because mining is essentially an economic game, through the game of all parties and a large amount of sunk costs, it is possible to maintain balance, while also ensuring the security of the system and preventing double spending. However, when the benefits of mining itself become smaller and the benefits of other commercial aspects become larger, how to ensure the security of the system and whether there will be conflicts between mining benefits and commercial benefits are all new topics that we need to study in the future.

3. Conclusion

1. The country’s attitude towards the Bitcoin mining industry may be relaxed in the short term, but it will remain negative in the long term;

2. Some specific blockchain projects are indeed inseparable from proof of work and mining;

3. Most projects will not adopt proof of work, but will turn to consensus mechanisms such as POS and DPOS;

4. Mining projects will most likely become computing-based and mining-assisted. General algorithms may gradually fade away, while specialized algorithms will gradually rise.