Computing power is king: a treasure map of the global mining industry

Text: Song Shuangjie, CFA; Cheng Dongfeng

Introduction

As the consensus of BTC increases, BTC "mining" is often called the "gold rush" of the new era. A huge industrial chain has been formed around BTC mining. This article will try to show the treasure map of BTC mining.

summary

The hot "blockchain" in recent years originated from BTC created by the mysterious figure Satoshi Nakamoto. The process of obtaining new BTC by competing for bookkeeping rights is vividly called "mining", which is an analogy of the way to obtain BTC stipulated by the network protocol to "gold panning" or "mining" in the physical world. BTC mining has gone from CPU mining to GPU mining, to FPGA mining, and finally evolved into professional ASIC mining machine mining. After the development of ASIC mining machines, the prelude to the mining "arms race" was officially opened.

As mining equipment continues to upgrade, the total network computing power of BTC is also rising. Bitmain, Canaan Creative and Ebang International, the three major miners, have made a lot of money in the "gold rush" of BTC mining, becoming a veritable case of "selling shovels during the gold rush". A huge industrial chain has been formed around BTC mining, from the upstream mining chip manufacturing to the midstream mining machine production, and finally to the "mining" behavior of mines and mining pools.

A mining farm is a collection of mining hardware, and a mining pool is a collection of mining machine output computing power. Miners connect their mining machines to a mining pool, contribute computing power to the mining pool, and jointly mine to obtain income, which is distributed according to the computing power contribution. Miners unite with other mining pools through mining pools to compete for mining, which can not only make the income more stable, but also avoid running full nodes. Cloud mining refers to the way miners directly purchase cloud computing power mining from institutions or individuals. It is the most convenient and fastest way to participate in mining. Risk warning: quantum computer technology is advancing by leaps and bounds, market trend risks

Table of contents

1 Blockchain technology is highly valued by the country and Internet giants

1.1 Blockchain as a national strategic technology

1.2 Blockchain originated from BTC

2 The Gold Rush of the New Era

2.1 BTC “mined” by computing power

2.2 Upgrading Mining Equipment

3 BTC Mining Treasure Map
3.1 Mining machine manufacturers - selling shovels during the gold rush

3.2 Mines - the front line of the "gold rush"

3.3 Mining Pools - Unity is Strength

3.4 Cloud Mining - A Simple Mode for Participating in Mining

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1 Blockchain technology is highly valued by the country and Internet giants

1.1 Blockchain as a national strategic technology
On the afternoon of October 24, 2019, the 18th collective study on the current status and trends of blockchain technology development emphasized that the integrated application of blockchain technology plays an important role in new technological innovation and industrial transformation; we must take blockchain as an important breakthrough for independent innovation of core technologies, clarify the main direction, increase investment, focus on conquering a number of key core technologies, and accelerate the innovation and development of blockchain technology and industry. China has always attached great importance to blockchain technology. As early as December 2016, blockchain was written into the "Notice of the State Council on Issuing the 13th Five-Year National Informatization Plan" as a strategic frontier technology and disruptive technology.

In recent years, more and more institutions have begun to pay attention to and participate in the research of blockchain technology. In the field of Internet finance, blockchain is listed as one of the four revolutionary technologies along with artificial intelligence (AI), cloud computing, and big data. Internet giants such as BATJ (Baidu, Alibaba, Tencent, and JD.com) have launched the "ABCD (artificial intelligence, blockchain, cloud computing, big data)" strategy.

1.2 Blockchain originated from BTC Blockchain technology originated from BTC created by the mysterious figure Satoshi Nakamoto. It is essentially a distributed ledger (database) maintained by multiple participating nodes. It does not rely on a third party and only uses distributed nodes to store, verify and communicate network data. Compared with centralized databases, blockchain has the characteristics of tamper-proof, openness and transparency.

2 The Gold Rush of the New Era

2.1 BTC “mined” by computing power
The BTC network is an anonymous blockchain network that any node can freely join. Through the clever POW mechanism, a consensus is reached with the participation of all nodes and meets the consistency, thus achieving the consistency of the trust strength of the application environment. Satoshi Nakamoto proposed the POW consensus mechanism in the BTC white paper "A Peer-to-Peer Electronic Cash System". The core idea is to ensure the consistency of consensus by requiring nodes in the network to pay a certain amount of computing power to compete for the right to record blocks (i.e., the right to keep accounts).

In the POW consensus mechanism, nodes compete for the right to record by investing computing power. The mining algorithm of BTC is the SHA256 algorithm. Miners compete for the right to record the BTC network by using the computing power they control to obtain BTC rewards. The principle is as follows: After the miners perform two SHA256 function calculations on the block header (block_header), if it is less than the difficulty target (target_bits), that is, SHA256(SHA256(block_header))< target_bits, it indicates that the miner has obtained the right to record the current block. Otherwise, the miners will change the random number (nonce) value until the above inequality is met and the right to record is obtained. Target_bits is set according to the difficulty of the network. The difficulty will be adjusted according to the prescribed algorithm after every 2016 blocks (about 14 days) are generated. The purpose is to ensure that the time interval between block generation in the network is about 10 minutes. SHA256 (x) represents the hash function, and the value range of x is called the search space of the node. The search space of nodes in the POW mechanism is all positive integers. Due to the characteristics of the Hash function, the left side of the inequality can be considered as a random variable uniformly distributed on the Hash function value domain. The target_bits is the same for all nodes. The probability of a node obtaining the right to record depends on the speed at which it calculates the Hash.

The process of participating nodes obtaining new BTC by competing for the right to record is vividly called "mining". The so-called "mining" is to compare the way of obtaining tokens stipulated by the network protocol to "gold panning" or "mining" in the physical world. The total amount of BTC is constant at 21 million. The "miner" node that generates the block will receive a block reward. Currently, a total of about 18 million BTC have been "mined". According to the BTC network protocol, the block reward of BTC "mining" will be halved every 210,000 blocks generated (about four years). Initially, each block was rewarded with 50 BTC. After two halvings, it has now dropped to 12.5 BTC. It is expected that in May 2020, the BTC block reward will usher in the third halving.

2.2 The Upgrade of Mining Equipment BTC mining has evolved from CPU (central processing unit) mining to GPU (graphics processing unit) mining, and then to FPGA (field programmable gate array) mining, and finally evolved into professional ASIC (application-specific integrated circuit) mining. Satoshi Nakamoto's original vision was that everyone could use their own computing power (personal computer CPU computing power) to participate in BTC mining, thereby building a decentralized network. As Satoshi Nakamoto said in the BTC white paper, "They vote with their CPU power". Since in the POW consensus mechanism, the probability of a node obtaining the right to record is related to the proportion of computing power owned by the node, this means that when the total mining computing power remains unchanged, the greater the computing power of a single node, the greater the probability of obtaining BTC block rewards. In 2011, GPU began to replace CPU for mining. Compared with CPU, the computing power of GPU has increased by dozens of times. The computing power performance of FPGA mining machines is on par with that of GPU mining machines, and the power consumption is lower. However, the output of FPGA chips is lower than that of CPU and GPU, and the equipment maintenance and management costs are higher. Mining programs need to be specially written, and the residual value of obsolete FPGA mining machines is also lower. FPGA mining machines first appeared in 2011 and were soon replaced by ASIC mining machines. Starting in the second half of 2012, professional ASIC chip mining machines were developed and mass-produced based on FPGA. In 2012, the computing power of the entire BTC network doubled. At this point, the prelude to the mining "arms race" was officially opened, and the "mines" of legionary operations began to appear on the historical stage.

With the continuous upgrading of mining equipment, the computing power of BTC network is also rising. On September 19, 2019, the computing power of BTC mining exceeded 100 EH/s, reaching 105 EH/s, and has now fallen back to 98 EH/s. The current computing speed of the BTC network is equivalent to 66 Summits (the fastest computer in the world) and 154 Tianhe-2As (the fastest computer in China).

3BTC Mining Treasure Map

A huge industry chain has been formed around BTC mining, from the upstream mining chip manufacturing to the midstream mining machine production, and finally to the "mining" behavior of mining farms and mining pools.

3.1 Mining machine manufacturers - selling shovels during the gold rush

As the price of BTC continues to rise, BTC mining has been completely taken over by professional ASIC mining machines. Currently, the more popular mining machine brands on the market are E-Bit, Antminer, Avalon and Shenma, which correspond to the four major mining companies, Ebang International, Bitmain, Canaan Creative and Micro-BT.

On October 11, 2019, Bitmain, the leading mining company, officially released the Antminer S17+ and T17+ on its official website. The standard computing power of S17+ is as high as 73TH/s. The new mining machine has the characteristics of high computing power, low power consumption and strong stability, which is expected to further consolidate Bitmain's leading position in the mining machine market.

According to the prospectuses submitted by Bitmain, Canaan Creative, and Ebang International in 2018, the three major miners all made a fortune in the BTC mining "gold rush", becoming a veritable case of "selling shovels during the gold rush."

According to the prospectus submitted by Canaan Creative to the U.S. SEC on October 28, 2019, its gross profit margins were 46.2%, 18.8% and 3.9% in 2017, 2018 and the first half of 2019, respectively, a significant decline, which is closely related to the sharp drop in the price of BTC.
On November 22, 2019, Canaan Creative, the second largest mining machine manufacturer, was approved by the SEC and officially listed on the Nasdaq Stock Exchange, becoming the first mining machine manufacturer to successfully go public. 3.2 Mining Fields - The Front Line of the "Gold Rush"
In 2012, professional ASIC mining machines came out, and BTC mining officially entered the era of "legionary operations", and mining farms composed of ASIC mining machines emerged like mushrooms after a rain.

China is the main producer of BTC. According to a report released by CoinShares Research in June 2019, it is estimated that 60% of the world's BTC is produced in China. In places such as Sichuan, which are rich in hydropower resources, there are a large number of small mining farms consisting of thousands of mining machines, and there are also large mining farms consisting of tens of thousands of mining machines. The cost of electricity is usually an important consideration in the site selection of mining farms. For example, the vicinity of hydropower stations left over from the former Soviet Union and the vicinity of coal-fired power plants in the desert areas of Inner Mongolia are all gathering places for mining farms. Behind the mining farms are both large consortiums like Bitmain and countless small and medium-sized miners who are optimistic about the benefits of BTC mining. Bitmain's vision is to build the world's largest mining business. On October 18, 2019, Bitmain announced in Texas that it would build a 50-megawatt mining farm with Rockdale City Development District (MDD) and DMG. In a sparsely populated area with abundant electricity, thousands of mining machines are roaring in the factories built by miners, at the forefront of the "gold rush", and about 1,800 BTC will be produced every day before the next BTC halving. 3.3 Mining pool - unity is strength A mining farm is a collection of mining hardware, and a mining pool is a collection of mining machine output computing power.
Miners connect their mining machines to a mining pool, contribute computing power to the mining pool, and jointly mine to obtain income, which is distributed according to the computing power contribution. As the current BTC mining computing power of the entire network is getting higher and higher, the computing power of a single miner accounts for a very small proportion (the current BTC network computing power is equivalent to the computing power generated by the joint operation of 1.29 million Antminer S17+), resulting in very unstable mining output. At this time, mining pools came into being. Miners unite through mining pools to compete with other mining pools for mining, which can not only make the income more stable, but also avoid running full nodes (running full nodes requires downloading and maintaining nearly 250G of BTC ledgers). At present, the mining pools with large computing power are mainly Poolin, BTC.com, F2Pool and AntPool. Among them, BTC.com and AntPool are mining pools under Bitmain.

3.4 Cloud Mining - A Simplified Mode for Participating in Mining Cloud mining refers to the way miners purchase cloud computing power directly from institutions or individuals. For example, on the NiceHash platform, users can purchase computing power through P2P to participate in the mining of multiple tokens such as BTC and ETH; Bitdeer simplifies the cumbersome mining steps for customers by packaging the complex links of mining machine purchase, logistics, mine selection, machine maintenance, and mining pool access.

Note: Due to some reasons, some of the terms in this article are not very accurate, such as: token, digital token, digital currency, currency, token, Crowdsale, etc. If readers have any questions, please call or write to discuss.