Caixin: Where is China’s Bitcoin mining headed?

[Caixin.com] (Columnist Qing Sude) On December 17, 2018, Bitcoin has fallen from its peak of $19,535 on December 17, 2017 to $3,251 today, a drop of 83.4%. Photos of the "miners" who have suffered heavy losses and are selling their mining machines by the pound have flooded their WeChat Moments. At the beginning of the year, mining machines still need to be pre-ordered and wait for a month to arrive. Will mining machines at the end of the year really fall to the point of "selling by the pound"? This article uses data to make an analysis and think about the future of "miners".

1. The competitive ecology of computing power leads to the centralization trend of mining pools

my country's mining pools rank first in the world in terms of computing power. According to the monthly statistics of BTC.COM on December 16, 2018, the global Bitcoin computing power has dropped to 36.74EH/s. Although the currency market has plummeted and the computing power has continued to decline overall, it has nearly doubled compared to the data at the beginning of 2018. At present, there are 17 well-known Bitcoin mining pools in the world, among which BTC.COM and AntPool, the mining pools under China's Bitmain, and the old mining pool SlushPool rank in the top three, accounting for 18.3%, 12.9% and 11.6% of the total network computing power respectively.

Mining pools have entered a stage of centralized monopoly, and it is difficult to build new mining pools. On the one hand, on November 16, 2018, the community's disagreement on the development ideas of the encrypted digital currency Bitcoin Cash (BCH) led to a "centralized command" computing power war in the "decentralized" world. The mining pools used their existing computing power to divide BCHABC and BCHSV into two different ecosystems, demonstrating the community's voice of computing power being king and central monopoly. On the other hand, small mining pools are developing slowly and showing a difficult development trend. First, on November 6, 2018, "Guochi" under BTCC, the first and once largest exchange in China, announced that it would shut down the mining server on November 15 and stop operating the mining pool indefinitely from November 30. Second, Huobi Mining Pool, which went online on March 30, 2018, relies on the strong funds provided by Huobi Exchange, and currently only accounts for 3.8% of the total computing power of the entire network.

2. Strong regulatory policies have caused mining farms to “leave the market and go overseas”

The concepts of mining farms and mining pools need to be clarified. A latest 7nm Antminer S15 can provide 27TH/s of computing power. For the computing power of the entire network of 36.74EH/s, the probability of mining Bitcoin is only one in 1.42 million. In order to stabilize mining output and reduce risks, Bitcoin miners (hereinafter referred to as "miners") gather together to form "mining farms" of varying sizes, and join mining pools. Through computing power integration, they obtain bookkeeping rights and divide the bookkeeping rewards according to the proportion of computing power. Therefore, although the computing power contribution of China's mining pool ranks first in the world, mining farms all over the world can access China's mining pool through the standard protocol (Stratum) to share rewards. So, where are the mining farms?

On the one hand, the strong regulatory policies adopted by the state force the mining farms/miners who receive Bitcoin rewards to trade over-the-counter. According to data released by BitcoinEnergyConsumptionIndex, the annual power consumption of Bitcoin mining is about 29.05TWh, equivalent to 0.13% of the global power consumption, exceeding 159 countries in the world. The state treats the huge amount of electricity consumption generated by mining with caution and adopts a strong regulatory control policy. According to Caixin.com, on January 19, 2018, the Payment and Settlement Department of the Business Management Department of the Central Bank issued an urgent document entitled "Notice on Carrying out Self-Inspection and Rectification of Providing Payment Services for Illegal Virtual Currency Transactions". Domestic payment institutions are strictly prohibited from providing services for virtual currency transactions, and effective measures are taken to prevent payment channels from being used for virtual currency transactions. The Bitcoin mined by miners can only be traded over-the-counter through the C2C model, and cannot be controlled through traditional financial monitoring systems. In addition, according to media reports, on November 5, 2018, regular mining farms in Guizhou and Xinjiang were required to shut down for rectification, accept tax inspections and conduct real-name registration. In addition, the mines were required to sign a guarantee letter from the public security department for network information security work. The mines in Xinjiang cleared the Bingtuan Electric in September.

The number of mining nodes in my country does not match the computing power of the mining pool. The "emergency overseas" under strong pressure is the main reason for inaccurate statistical data. According to the statistics of BITNODES on December 16, 2018, there are 9,605 Bitcoin mining nodes in the world, 2,324 in the United States, accounting for 24.20%, 1,842 in Germany, accounting for 19.18%, and China ranks fifth with 461, accounting for only 4.80%. In summary, China, which ranks first in global computing power contribution, has only 4.8% of its mining machines in China? ! According to the analysis of IP location, miners are generally distributed in first- and second-tier cities such as Beijing, Shanghai, Guangzhou, and Wenzhou, which is very different from the actual location reported by the media, Inner Mongolia, Xinjiang, etc. For example, foreign media QUARTZ, Coindesk, CoinTelegraph, etc. have enthusiastically reported and praised the world's largest mining farm, the Bitmain mining farm located in Dalate Banner, Inner Mongolia. In addition, in order to prepare for the BCH "hard fork", starting from the end of October 2018, Ant Pool, a subsidiary of Bitmain, held intensive talks with major mining farms in Xinjiang and urgently deployed 90,000 S9 mining machines.

The use of global deployment nodes and VPNs is the root cause of inaccurate statistics based on IP geographic information. On the one hand, the stability of network connections is the lifeline of mining farms. Therefore, many mining farms disperse their forces and connect multiple mining pools. Each mining pool is also globally deployed, building access points in the United States and Europe to form a high-speed access network distributed around the world, reducing the orphan block rate and empty block rate of the mining pool, and improving the mining efficiency of the mining pool. On the other hand, as mentioned above, in order to evade the country's strong regulatory policies, many mining farms and mining pools use virtual private networks (VPNs) to connect to proxy servers in the United States and Europe, with multiple virtual networks, and each network connection constantly and dynamically changes the IP address to prevent national bans.

3. Where is the future of Bitcoin mining, which is constrained by many factors?

As we all know, since January 2018, the prices of many encrypted digital currencies have fallen by 70%-90%. The income from mining has been negligible, not enough to buy electricity, and has reached the "shutdown price" of mining machines. At the same time, each mining pool also charges a "commission" of 1%-2%. There are also notorious network hacker attacks (DDoS) between mining farms. Faced with such a constrained living environment, what should Chinese Bitcoin miners do in the future? The answer is: they can only transform and upgrade.

The transformation direction of the "revolutionaries": in-depth research on artificial intelligence chips. It is worth noting that in December 2017, Bitmain's 10nm wafer orders to TSMC exceeded Huawei HiSilicon. In 2018, Bitmain successfully launched the Antminer S15 and T15 with 7nm chips. In addition, in the fourth quarter of 2017, Bitmain launched its first-generation AI chip, Suanfeng BM1680; on October 17, 2018, Bitmain officially released its second-generation cloud AI chip Suanfeng BM1682 and terminal AI coprocessor BM1880. At the same time, another domestic Bitcoin mining machine manufacturer, Canaan Creative, released its first-generation artificial intelligence chip Kendryte (model K210) on September 6, 2018. The transformation from Bitcoin mining machines to artificial intelligence chips is in line with the national strategy and industry development trend of artificial intelligence. In the future, the combination of blockchain and artificial intelligence is also a field of integrated innovation worth looking forward to.

The transformation direction of the "reformists": speed up the pace of "moving from virtual to real". For Bitcoin mining farms, carefully consider the sunk costs generated by reinvestment. Bitcoin mining machines use the double hash (SHA256) algorithm to "mine". Mining machines that generally use application-specific integrated circuit (ASIC) chips are not like image processing chip (GPU) mining machines. They can be transferred to data centers and earn "commissions" for computing services in the "GPU cloud service" model. Therefore, although the price of mining machines has also dropped a lot, it is necessary to carefully weigh the sunk costs derived from reinvestment. For Bitcoin mining pools, it is necessary to speed up the pace of "moving from virtual to real". Although mining pools can charge 1%-2%, or even higher agency fees to obtain considerable income, this profit model has begun to show signs of fatigue with the sharp drop in the price of the currency. At the same time, gimmicks such as "watching TV is mining", "running is mining", and "mining is mining" have not brought actual profit models. They still belong to the category of point distribution and are not a long-term sustainable development model.

According to the Blockchain White Paper (2018) released by the China Academy of Information and Communications Technology, driven by policies, technologies, and markets, blockchain technology is deeply integrated with the real economy, which is of great significance for exploring new models of shared economy, building a digital economy industry ecosystem, and improving the level of government governance. Therefore, it is an important proposition that operators of mining pools and mines need to seriously consider to explore and move forward in multiple aspects such as talent training, enterprise incubation, technology research and development, and safety testing, fill the gaps in the industry ecosystem, accelerate the reconstruction of business models and application ecosystems in vertical fields with blockchain technology, and make advance layouts in the blue ocean of the "value Internet".

Qing Sude, PhD, senior engineer, blockchain supervisor of China Academy of Information and Communications Technology, director of the Trusted Blockchain Promotion Program Office, chairman of the Industrial Internet Alliance Industrial Blockchain Ad Hoc Group, and head of the ITU-T FG DLT Distributed Ledger Focus Group Test and Evaluation. He is a member of the core compilation team of the National 13th Five-Year Plan for Informatization and the person in charge of the Blockchain White Paper (2018) of China Academy of Information and Communications Technology. He is the author of the blockchain chapters of Ma Huateng's Digital Economy and Zhou Hongren's Analysis and Forecast of China's Informatization Situation.

Editor-in-charge: Zhang Fan (ZN005) | Layout Editor: Wu Qiuhan