Why has the mining pool business become so popular among exchanges?

Mining pools, which have been making a fortune in silence, have attracted attention this year due to production cuts and the entry of Binance. On April 1, Binance founder Zhao Changpeng admitted that Binance would launch a mining pool business. Later, media reported that Binance Mining Pool had hired former employees of Bitmain and was recruiting customers through Chinese miners. With the official layout of Binance, the three major domestic exchanges are now involved in the mining pool business.

The top mining pools have an annual income of over 100 million yuan

Why are mining pools frequently favored by leading companies? Perhaps we can find some answers in a set of "really good" data released by PAData in early 2020.

In 2019, the actual output was about 678,700 BTC, and the annual transaction fees (mining fees) were about 19,473 BTC. Based on the average price of Bitcoin of US$7,365.21 in 2019, the annual miners' income was approximately US$5.14 billion.

If calculated based on the 3% commission rate of the mining pool, in 2019, the estimated annual revenue of BTC.com, the largest Bitcoin mining pool, is about 26.495 million US dollars (186 million yuan). F2Pool also has an estimated annual revenue of more than 20 million US dollars, reaching 20.0677 million US dollars (140 million yuan). In addition, Poolin, AntPool, SlushPool, ViaBTC, and BTC.TOP also have estimated annual revenues of more than 10 million US dollars.

Mining pools provide exchanges with a major source of non-trading BTC, increasing the supply of BTC in the market and injecting liquidity into the market. According to Chainalysis data, in 2019, mining pools sent 700,000 BTC to all exchanges, and 10 major exchanges received 77% of them. The main exchange receiving BTC is Huobi, accounting for 29%; followed by OKEx, accounting for 12%. In addition to these two exchanges, exchanges are also competing for BTC from mining pools.

For exchanges, another reason for entering the mining pool is that they are interested in the lending needs of miners. PayPal Finance, which mainly provides crypto asset lending services to miners, reported good news in 2019, with a loan balance of $289 million in digital currency, a year-on-year increase of 3,780%. This figure reflects the natural demand of miners for lending, and this piece of fat will undoubtedly be targeted by exchanges.

Why did the three exchanges with the highest ranking in mining pools enter the market?

In the face of such huge potential benefits, the motivation of the leading exchanges to enter the mining pool sector is obvious. How do mining pools with exchange backgrounds stir up the market?

Among the mining pools with exchange backgrounds, Huobi.pool has entered the top 10 mining pools in 2018 and its computing power share has been relatively stable, fluctuating between 3% and 6%. 1Thash&58COIN and OKExPool started late but have caught up later.

Especially the OKExPool mining pool. According to the data released by BTC.com, OKExPool has rapidly developed from a share of about 0% in October 2019 to the sixth largest mining pool in terms of market share. However, in the computing power trend curve, OKExPool's computing power dropped sharply in January 2020. Some market insiders told PANews that it can be inferred that the reason for the rapid increase in OKExPool's computing power may be the participation of more centralized large-scale mining farms, and there is still a lack of retail investors in the computing power structure.

Although exchanges are generally newcomers in the mining pool field, they still have certain natural advantages over traditional enterprises in conducting mining pool business.

On the one hand, the profitability of the leading exchanges is unquestionable, which gives them an inherent credit endorsement in the crypto-currency and miner groups; in addition, with the capital accumulation in the early stage, the mining pools familiar to the exchanges can engage in "price wars" in the early development stage, and sign competitive mining pool commissions and fees with large mining farms in the industry, thereby attracting more miners to join, which is also the customer acquisition method currently reportedly used by Binance. In addition, the mining pool business can be linked with the exchange, and for miners who join the exchange mining pool, they may be able to enjoy lower exchange transaction fees in the future.

Many heroes are competing for supremacy, and dangers are lurking everywhere

While more and more exchanges are entering the mining pool business, some powerful traditional mining pools are also falling.

Recently, there was news that "the Better Mining Pool under Wanyou Computing Power was cleared out, and its computing power was once ranked in the top ten." The reason was related to the mining pool's low profitability and lack of profit.

Currently, there are five mainstream Bitcoin settlement modes in all mining pools, namely PPS, PPS+, PPLNS, SOLO, and FPPS. Among them, the three most commonly used settlement methods are PPS, PPS+, and FPPS.

Profit trend chart of the three major settlement modes of mining pools

It can be considered that over a long period of time, the actual number of blocks mined by the mining pool is equal to the theoretical number of blocks mined. The average handling fee for mining pool blocks is the same as the average handling fee for the entire network. Therefore, as a stable miner, the income of PPS+ and FPPS modes will not be much different. The income of miners is mainly related to the computing power and the commission of the mining pool, but in the long run, it is less related to the settlement mode.

Senior mining industry insiders revealed that not all miners will pay the 3%-5% mining pool commission. The current mining pool market is relatively transparent. Generally, medium-sized mining farms can negotiate a 1.5% mining pool commission. For example, if there are more than 100,000 mining machines, the commission can be even lower. Therefore, in the medium and large mining farms, the mining pools are not optimistic about profitability, and they earn more from the commissions of small miners. Once the miner structure in the mining pool is unbalanced or the main miners are lost, the mining pool will also face the risk of withdrawal.

Disappearing mining pool

The fierce competition in the mining pool industry is obvious. Among the mining pools that are currently surviving, it is not difficult to find that only those with the following advantages can survive in the fierce competition among mining pools.

The first is the technical advantage, with stable block production and stable income; the second is the cost advantage. In the mining pool dominated by Bitmain, the cost of mining machines is undoubtedly advantageous. The third is the user advantage, with the inherent advantage of customer acquisition, which changes the composition of miners in the mining pool. The fourth is the capital advantage. Only with the capital advantage can we survive in the years-long bear market in the crypto market.

The Future of Exchange Mining

How can exchanges with user advantages make good use of their advantages to further develop in the mining pool sector? Cloud computing power may be one of the answers.

For retail investors who only want to invest tens of thousands or hundreds of thousands to mine, they will face multiple problems, such as technical barriers. They don’t know how to choose mining machines, nor do they know how to maintain and set up mining machines. There are no special mining sites, and most people choose to keep them at home. The high noise and heat dissipation generated by mining machines will seriously affect their lives. There is also the problem of electricity bills. Most household or industrial electricity costs are between 0.8 and 1 yuan, and mining machines consume huge amounts of electricity every day. Most of the income will be used to pay for electricity bills, which will seriously affect their own profits, lengthen the payback period, and lead to more risks.

Due to the above three thresholds for mining, cloud computing mining has begun to become another option for retail miners.

As early as 2019, Huobi has launched computing power packages, OKExPool will also launch cloud computing power, and cloud computing power platforms such as BitDeer have begun to take shape.

Although cloud computing products still have a lot to be improved, in the foreseeable future, cloud computing may be another territory for mining giants to compete. Compared with other mining pools, exchanges naturally have more potential user groups. They also have inherent advantages in acquiring customers for new mining forces. It is more convenient to promote business in the development of self-operated mining pools or cloud computing platforms.

Source: PANews