China's Bitcoin mining machines monopolize the world: the most neglected manufacturing industry sample

Author | Liu Peng

Director | Zhu Yangteng Duan Yubing

Editor | Bao Jianguang

In mid-January 2018, Shenzhen was cloudy and rainy for several days, and the temperature dropped below 10℃, marking the arrival of winter in the south.

But the mining machine business of Huaqiangbei businessman Ding Rui is in the peak season. He has just completed an order of 100 mining machines worth more than 3 million yuan. The person he traded with was a Russian who came from Moscow. After receiving the promise of immediate delivery, he readily paid the deposit.

In Huaqiangbei, merchants like Ding Rui have become a large group. They have keenly sensed business opportunities in the astonishing rise of digital currencies such as Bitcoin and Ethereum, and with the production and sales capabilities behind Huaqiangbei, they have expanded their mining machine business network across the country and even the world.

Sweeping under the wave, in just half a year, Huaqiangbei has wiped out the slump it had suffered in recent years due to the impact of e-commerce. The story of shop shortages and rising rents has been repeated. Even the scalpers at the door who approach you have changed from "invoices, invoices" and "mobile phones, mobile phones" to "mining machines, mining machines."

In the process of the rapid growth of digital currency, the rise and fall of price figures are the focus of most attention. As for how mining machines produce digital currency, few people are willing to seriously understand it.

But in fact, if there were no developers and producers of mining machines, Bitcoin might still be produced by geeks' laptops in their spare time. This also means that it will not enter the investment field of the general public, let alone rise to a sky-high price.

What is even less known is that the mining machine production and distribution chain monopolized by the Chinese is also a typical epitome of “Made in China” leading the world.

Backed by the strong manufacturing infrastructure in Shenzhen and its surrounding areas, "Made in China" has firmly monopolized the design and production of various mining machines in the past few years. The world's top three digital currency mining machine manufacturers, Bitmain, Canaan Creative and Ebang Technology, account for more than 90% of the global market share - all three companies were founded by Chinese.

In the chip industry, the chip design and development capabilities of mining machine manufacturers have become the fastest growing segment of the professional chip industry. Top venture capital companies such as Sequoia have also invested in the leaders in the field of mining machine production.

Now, ambitious mining machine manufacturers have begun to expand into the field of artificial intelligence. They believe that their technological accumulation in the field of computing power can just solve the problem of insufficient computing power of artificial intelligence chips.

The story of mining machines is more worthy of Chinese companies' in-depth research than the fluctuating prices of digital currencies.

It is most appropriate to start telling the story of the mining machine industry chain from Huaqiangbei, which is known as "China's No. 1 Electronics Street".

The change in Huaqiangbei: Everyone is talking about mining machines

Entering Huaqiangbei's landmark SEG Plaza, the words "mining machine" quickly caught my eye in the floor guide. The 4th and 5th floors here are basically occupied by mining machine merchants.

Ding Rui is one of the earliest merchants to run a mining machine business here. His original main business was selling graphics cards and computer cases. Merchants who used to sell computers and mobile phones have changed their business and sell mining machines. Some merchants have not even changed their original signs, and they directly put mining machines on the counter to attract customers. For them, the crazy machine is no different from the previous computer hardware, but it is more in short supply.

The investment manager of SEG Plaza told Prism that after the mining machine business became popular, the rent of the shops here increased by nearly one-fold, but it still could not stop the enthusiasm of the merchants. Shops are in short supply, so they decided to use the Spring Festival holiday to re-plan some shops with unreasonable space and then divide them up for rent.

"Buy mining machines from SEG," the investment manager said excitedly. "It has already gained international recognition!"

What merchants in Huaqiangbei like most are these international buyers. Ding Rui’s experience is: “They have clear goals, usually want large quantities, and their visas are limited, so they will make decisions quickly.”

After the mining machine business became popular, sellers also adopted some new practices. Some merchants took a different approach and provided derivative services to attract customers. For example, in the mining machine hosting business, merchants found stable electricity and sites, built a mining farm, and buyers chose hosting after purchasing the mining machine. After paying the hosting fee, they did not need to consider other issues. In a merchant with a signboard of "ASUS Computer", the salesperson in the store strongly promoted this model and used a calculator to skillfully input various numbers to demonstrate the payback period.

In half a year, the price of mining machines, which originally had a factory price of around 10,000 yuan, was hyped up to over 30,000 yuan, but they are still in short supply.

A mining farm owner in Sichuan experienced this kind of madness. At the end of 2017, he replaced the old mining machines in the mine and entrusted them to a familiar merchant in Huaqiangbei to resell them. "The second-hand machine that I used for a year was actually more expensive than the price I paid for it."

China's first show of strength: a perfect combination of talented teenagers and Made in China

Huaqiangbei has become the largest mining machine sales and distribution center in the country and even the world. The support behind it is the strong electronic industrial design and manufacturing capabilities of Shenzhen and nearby areas.

Jin Xin, the founder of Mamba Mining Machine, felt deeply about this. He made up his mind to enter this industry in September 2017. He found all the parts for producing mining machines in Huaqiangbei and quickly started production at a foundry in Bao'an, Shenzhen. This is impossible to achieve anywhere else in the world.

Jin Xin's feelings are not unique. Antminer, which occupies the largest share of the mining machine market, is also manufactured and assembled in Shenzhen OEM factories, and then transported to buyers around the world through Shenzhen's location advantages.

The "Made in China" power represented by Huaqiangbei and Shenzhen shocked the entire Bitcoin world when it first made its move five years ago, and has since dominated the mining machine industry chain.

In June 2012, an organization called Butterfly Labs claimed that it was researching professional ASIC mining machines. If the research and development is successful, Butterfly Labs is likely to control more than 51% of the computing power in the Bitcoin world, which also means that the organization can tamper with the Bitcoin blocks and have almost complete control.

"The free world of Bitcoin is going to be destroyed!" The "butterfly" flapped its wings across the ocean, awakening a group of Bitcoin enthusiasts in China. Zhang Nangeng (known as "Pumpkin Zhang" in the cryptocurrency circle), who is still studying for a master's degree in integrated circuit design at the Beijing University of Aeronautics and Astronautics, and Jiang Xinyu (known as "Baked Cat" in the cryptocurrency circle) from the junior class of the University of Science and Technology of China, represented China in the fight.

Pumpkin Zhang is widely regarded by the cryptocurrency community as the inventor of the world's first ASIC mining machine. He named it "Avalon" and sold it all over the world, successfully sniping Butterfly Labs.

Compared with Pumpkin Zhang's "first", the "Baked Cat Miner" developed by the genius boy Jiang Xinyu has achieved larger-scale mass production.

In July 2012, Jiang Xinyu used the nickname friedcat (which means "fried cat") to launch a crowdfunding campaign on the bitcoin forum bitcointalk. The crowdfunding shares were directly transferred to friedcat mining machine shares and anchored to bitcoin. Although shares were issued instead of tokens, this process is still regarded by many as the first attempt at ICO (Initial Coin Offering) in China.

Wu Jihan, a legendary figure in the cryptocurrency world who was the first to translate Satoshi Nakamoto's white paper, invested tens of thousands of yuan. After the successful development of the BakeCat mining machine, this investment brought him a return of tens of millions and enabled him to later establish Bitmain, the world's largest mining machine manufacturer.

In early 2013, Avalon and Bakecat miners were shipped one after another, while the original challenger, Butterfly, was nowhere to be seen. In the following years, despite the loss of contact with Bakecat and the rise of new overlords, with the help of the perfect infrastructure and production capacity of "Made in China", China has since become the unshakable overlord of the mining machine industry chain.

Prequel to the hash rate war: The timing brought by Bitcoin price guarantee

However, the idealism of playing the role of savior has been pushed into the abyss because of this computing power arms race.

In 2013, Bitcoin made its debut in front of the world. Its price rose more than 100 times within the year, reaching a high of 8,000 yuan. Early adopters were surprised to find that professional-grade mining machines were like goose that lay golden eggs, which could continuously bring huge wealth. The prices of Avalon mining machines and Friedcat mining machines were hyped up to six figures in the market, but they were still in short supply.

The beneficiaries who have tasted the sweetness never want to go back to the past. The balance originally designed by Satoshi Nakamoto that everyone can participate in mining and get Bitcoin rewards with a laptop has been completely broken. ASIC professional mining machines designed and manufactured in China have staged one computing power arms race after another in the Bitcoin world, raising the threshold of "mining" by tens of millions of times. Ordinary computers have become history, and integrated circuit mining machines priced at tens of thousands of yuan have been put on the stage.

Liao Xiang, CEO of Lightning Intelligence, personally experienced and participated in the arms race. He told Prism that in the early days of the industry, traditional chip manufacturers, such as Intel, AMD, and Nvidia, simply looked down on this business, while second- and third-tier chip manufacturers had no time to care about it.

"It can be said that the fact that traditional chip manufacturers did not intervene for various reasons has given the industry a large window of opportunity. Whoever can develop the latest chips and put them into production will win."

Wu Jihan, an early investor of BBK, became the biggest winner in this round of arms race. He and Zhan Ketuan, a chip expert whom he met by chance on the street, co-founded Bitmain in 2013. Bitmain developed ASIC chips in half a year and launched the mining machine named "Antminer S1" to the market in November 2013.

"Bitmain's rise can be said to be a combination of the right time, right place, and right people," said someone who also experienced the computing power arms race. First of all, the combination of the two founders was "a golden pair" in the mining machine startup circle at the time, because "Wu Jihan understands Bitcoin and Zhan Ketuan understands chips." In the early days of the industry, such a combination was particularly precious.

In addition, there is the element of “luck”. Antminer S1 was first released when the price of Bitcoin was soaring the most. This gave Bitmain enough food and grass when the price of Bitcoin hit a low point in 2014, and it had the funds to support the development of the next generation of chips.

“The only way to defeat all martial arts is to be fast. If Zhan Ketuan had developed the ASIC chip a month later, the price of Bitcoin would have dropped from 8,000 to 800, and there might not have been a future.”

Amid fierce competition, many mining machines produced by entrants are facing the risk of being eliminated before they even leave the factory due to the limitation of the computing power that the chips can bear.

The FriedCat mining machine, which once occupied the majority of the network's computing power, also began to fall behind. At the end of 2013, when the price of Bitcoin was soaring, the development of the second-generation chip of FriedCat encountered setbacks. Just like the ending of Butterfly Labs, the enemy it and Avalon defeated together, in a node with rapidly expanding computing power, one step slow means all steps slow. Under the competition of other opponents, the FriedCat mining machine quickly fell from more than 20% of the computing power of the entire network at its peak to 4%. After struggling for more than a year, FriedCat mysteriously disappeared on the way to inspect the production line, and it remains a mystery to this day.

The shortcoming of artificial intelligence: Will the computing power bottleneck be broken by mining machine manufacturers?

In the list of the first batch of customers of TSMC, the world's top chip foundry, for its most advanced 7-nanometer process in 2018, Bitmain was listed alongside well-known manufacturers such as Qualcomm, Nvidia, AMD, and HiSilicon. In a new round of financing in 2017, Bitmain attracted Sequoia and IDG to join, with a valuation of "billions of dollars."

Pumpkin Zhang, who developed the world's first ASIC mining machine, is no less impressive. After failing to acquire the A-share company Luyitong through a backdoor listing, the company he leads, Canaan Creative, submitted an application for listing on the New Third Board and was valued at 3.3 billion yuan in a new round of financing. Data obtained by The Prism shows that benefiting from the astonishing rise in Bitcoin prices in 2017, Canaan Creative's revenue exceeded 2 billion yuan in 2017, most of which came from mining machine sales. Corresponding to this number is a research and development team of only 30 people.

After monopolizing the global mining machine market share, the two companies have discovered a new source of excitement: with the help of the computing power technology accumulated by Bitcoin mining machines, they can replicate their experience in the world's most cutting-edge technology field - artificial intelligence.

According to a person from Canaan Creative, among the elements for realizing artificial intelligence, algorithms are generally the most valued one, while computing power has been neglected. In terms of algorithms, chip manufacturers AMD and NVIDIA are at the forefront of deep learning through the graphics cards (GPUs) they design and produce. However, after years of accumulation and development, algorithms have become very mature, and computing power has become the biggest shortcoming restricting artificial intelligence. "Why can't some artificial intelligence robots walk upright? The fundamental reason is still computing power."

At the chip level, Bitmain's product strategy director Tang Weiwei predicted that just as Bitcoin mining chips have gone through the process from CPU to GPU to ASIC dedicated chips, artificial intelligence chips will also repeat the process from CPU to GPU to ASIC.

"Graphics processors represented by GPUs drove the first wave of artificial intelligence... But with the development of the industry, with the maturity of deep learning algorithms, and with the rapid evolution of system architecture, the number of dedicated chips (i.e. ASICs) will exceed that of GPU chips by 2020," Tang Weiwei said confidently.

Bitmain launched its AI-based chip brand “Suanfeng” in January 2018, and Canaan Creative is also making related moves at an accelerated pace.

"This is an opportunity for China to catch up with or even surpass the United States in the field of chips." At the launch ceremony of Bitmain's "Suanfeng", Wang Jun, director of AI product technology, said excitedly.

However, this time, the two companies are facing a very strong lineup of opponents. Top players such as Google, AMD, and Nvidia cannot be underestimated in terms of R&D funding support, technology, and data accumulation.

A senior observer in the field of artificial intelligence pointed out that because "the algorithms for artificial intelligence training may change, and the training data and ecology are not in their own hands", he expressed concerns about the way out.

But he also saw the positive side. The two companies chose the ASIC direction with the most experience advantage. They are the forces nurtured in the blockchain ecosystem and are launching an impact on traditional chip manufacturers.

Those foundries in Shenzhen and merchants in Huaqiangbei should be looking forward to the explosion of this market as soon as possible. When the mining machine, a technology-driven "Made in China" product, becomes a hot seller, no one will miss the era of "copycat machines" with price wars every day.