Popular Science | Bitcoin Mining Three Articles: Business Model, Logic of Chicken Farms

Editor’s note: The original title is “Bitcoin Mining Three Articles (1): Business Model, Chicken Farm Logic”

This series of articles begins to explain the knowledge related to mining. Bitcoin mining is the largest and most important type of mining ecosystem. Bitcoin mining is also the top of the current blockchain industry contempt chain. As for why it is at the top, we will talk about it later. With three articles directly cut into, all the relevant knowledge of Bitcoin mining is connected, and you can directly understand this mysterious and closed industry.

Today is the first introductory article, which uses the logic of a chicken farm to reconstruct the Bitcoin mining industry, which is the most easy-to-understand explanation; the second article is an advanced article, which covers cryptography, hardware, mining principles, and a brief history of the development of mining machines; the third article is a high-level article, which covers specific calculation methods such as computing power, cloud computing power, and the payback period of mining machines.

The above is the summary of the contents of these three articles. Today’s content is easy to understand so that relatives and friends can fully understand it when they tell it to them.

There are two kinds of narratives in the world, one is to complicate simple things, the other is to simplify complex things. We want to do the latter. This article will use the business logic of chicken farms to compare Bitcoin mining, and you will find that the two are so similar.

Basic logic of mining: virtual currency under Tamagotchi

Each of us has eaten eggs in our daily lives, and we may have also seen hens. Hens lay eggs, which everyone understands.

Imagine what the market would be like if hens laid golden eggs?

First, someone buys the golden eggs and sells the gold directly in the market. This is a secondary market transaction that takes place on the exchange. You can make money with the price difference. Then someone will think, I can raise hens and let them lay eggs, so I can sell the golden eggs and reduce costs. From the pure transaction of buying and selling gold, it has become the production of gold and then the sale of gold. This is manufacturing. Produce and then sell.

The golden egg is now replaced with Bitcoin, and the hen is the mining machine. There are chicken farms in the world, so there are mining farms in the world, which is convenient for management. The pursuit of egg-laying efficiency of hens and the process of constantly breeding faster and stronger fighting chickens are the iterative upgrades of mining machines. Bitcoin mining is the virtual currency under the electronic chicken. Virtual currency can of course also be called digital currency or cryptocurrency, and here it specifically refers to Bitcoin. It doesn’t matter what it is called. Dear miners and mine owners, the business model is essentially the same as that of chicken farm owners.

Of course, as the new generation of hens are bred, the ability of hens to lay eggs is no longer fast enough. So you pull the hens (that is, the mining machines) out of the factory and sell them to others. This is the second-hand mining machine market.

Those companies that cultivate better mining machines with greater computing power are essentially the same as companies that cultivate better egg-laying hens. Among them, the most recently listed company is Canaan Creative. The current leading mining machines are Antminer (Bitmain) and Whatsminer (MicroBit).

Mining machine hosting means that I bought hens, but the quantity is not particularly large or I really feel that it is troublesome to manage them, so I go to find the boss of the venue and talk to him. You help me host my chickens, and I will pay you the hosting fee, so that I can save time and effort.

Well, cloud computing power is easier to understand. I go to a cloud computing power platform (they have a chicken farm with chickens, or can contact such resources), and say that I want to buy the egg-laying capacity (computing power) of 100 chickens. In this way, I can buy a contract for a month, a quarter, or a year, sell the eggs, and after the platform deducts the fees, the rest is my profit.

Of course, there is one last concept, called mining pool. The description of mining pool involves the specific process of mining, that is, the working principle of mining machine. We will mention the concept of mining pool again in the next article. Here is a brief description.

The process of mining by bitcoin mining machines is like a group of old hens trying to lay golden eggs (or the process of solving math problems is the process of mining). As long as a hen lays an egg and shouts "I have laid an egg" and broadcasts it (that is, the correct answer will be broadcast to the Internet), all the chickens will stop laying eggs (after confirming that they have indeed laid eggs and have solved the problem first). Prepare for the next egg-laying process, so it is possible that a single mining machine or several mining machines may not mine a block in a year, which is purely a waste of electricity and money. Therefore, some people want to recruit, simply aggregate computing power, and mine together, for example, 10,000 mining machines, dig out 10,000 BTC in a period of time, deduct some handling fees, then each machine can basically get 1 bitcoin, and everyone is willing to do it. Therefore, at present, all bitcoin mining machine mines are connected to mining pools.

In the above description, hens, chicken farms, and egg-laying capacity correspond to mining machines, mining farms, and computing power. At the same time, the analogy extends to the concepts of the second-hand mining machine market, mining machine companies, mining pools, and cloud computing power. I believe that everyone has basically understood the entire mining ecosystem and business model after reading this.

Why would anyone mine? Why not just buy the coins?

Any commodity has a source. On January 3, 2009, Satoshi Nakamoto mined the first block. At that time, Bitcoin came into the world. If the cost of Bitcoin mining is higher than the secondary market price, it is likely that most miners will choose to shut down, affecting the entire network.

Most of the time, the cost of Bitcoin mining is lower than the secondary market. You can directly raise a hen and let it lay an egg, sell one, and use the money to pay for feed and food (that is, the electricity bill corresponding to the mining machine, etc., the electricity bill is the big expense). As long as the sales volume is greater than the electricity consumption, it is a money-making business. After a while, the money earned exceeds the money spent on buying the machine at that time (this period of time is called the payback period of the machine), then you can buy more machines and expand the scale to continue production - this is the basic logic of the manufacturing industry.

Therefore, it is normal that many people in the currency circle do not understand the mining circle. The currency circle follows financial logic and the mining circle follows manufacturing logic, which are very different in themselves. Most of the big miners are not interested in currency speculation, and most of the time they do not care about the rise and fall, because the rise and fall is just a short-term profit for them. Many people in the currency circle also do not know much about mining machines, because mining machines require production scale, heavy investment and hardware knowledge.

Today’s article uses the analogy of a chicken farm to help you understand the basic industrial chain of Bitcoin mining. It is the most basic introductory article. Starting from the next article, mathematical formulas will be used to explain the principles of Bitcoin mining, hardware development, a brief history of mining machines, etc. Please stay tuned.