The history of Bitcoin mining (Part 2): The birth of giants, the ASIC era

3. The birth of a giant: the ASIC era

3.1 Arms Race

In 2012, people realized that they could improve mining efficiency by designing specialized ASIC integrated circuits for hash calculations. It turns out that ASIC mining is hundreds of times faster than graphics card mining with the same energy consumption.

However, ASIC manufacturing is expensive. The production of hardware chips requires a lot of money, which is far beyond the reach of ordinary individuals.

So, everyone thought about fundraising.

First, Butterfly Laboratories (BFL) began accepting orders for ASICs using 65nm manufacturing technology.

They raised a lot of money, but the progress of research and development was extremely slow - for eight consecutive months, they only demonstrated the chassis of the ASIC prototype once at the CES (Consumer Electronics Show) in January 2013.

People waited and were unhappy about it.

At this time, several other people in the Bitcoin community came out and said, "I can also make ASIC mining machines, but I don't have the money."

But for the Bitcoin community, which has already started to go crazy, money is not a problem at all. On August 9, 2012, a Shenzhen company spokesperson named "Baomao" posted on BitcoinTalk, claiming that his team could develop ASIC mining machines and raise funds for startups by offering Bitcoin to netizens around the world.

The shares were quickly snapped up.

On January 3, 2013, the prototypes of this batch of mining machines came out and ran stably, officially marking the advent of the ASIC era.

17 days after the BBQ team released the prototype, another Chinese team, the Avalon team, completed the delivery of the first mining machine. Jeff Garzik, a core developer of the Bitcoin network, was fortunate enough to become the owner of the first commercial ASIC mining machine.

On April 20, 2013, Swedish professional ASIC design company ORSoC announced that they will join hands with KNCminer to design and produce professional ASIC Bitcoin mining machines.

... ... ...

The arms race has begun.

3.2 Crazy Rise

Bitcoin production is halved every 4 years.

At the end of 2012, the production of Bitcoin was halved for the first time. If you know a little about economics, you will definitely think that the reduction in supply will lead to an increase in price.

Coincidentally, the Cyprus financial crisis has made Bitcoin a hot topic.

As governments levy taxes on bank depositors and impose tough capital controls, people are scrambling to find a way out of their money.

Those who no longer trust the government are suddenly discovering that Bitcoin may be able to save their wealth.

So more and more people began to convert their savings into Bitcoin. The government really has no way to seize your Bitcoin. The Americans wanted to block WikiLeaks' Bitcoin account, but have not succeeded so far.

As a result, the price of Bitcoin has continued to rise recently, and the news media coverage brought about by the rise has attracted more attention, causing Bitcoin to rise faster and faster, finally reaching a high of US$260 on April 10, 2013.

This wave of price increase from 25 USD to 260 USD, in just two or three months, the price increased by more than 10 times. From April 2010 to June 2011, Bitcoin soared 1,000 times in 14 months.

So on April 11, 2013, someone wrote an article titled “The Intrinsic Value of Bitcoin”, which fully reflected the optimistic sentiment of the market at that time. Quoted below:

What is the fair value of Bitcoin? It depends on how high you think Bitcoin can reach as a "currency".

If you think Bitcoin is similar to gold, the total value of gold reserves of central banks around the world is about 12 trillion US dollars, which means that one Bitcoin is worth about 570,000 US dollars.

If you think that Bitcoin can completely replace US dollar bills, the US dollar's M0 (currency issuance minus cash in financial institutions' inventory, which can be simply understood as cash in circulation) is about 900 billion US dollars. If it is replaced by 21 million Bitcoins, one Bitcoin is worth about 45,000 US dollars.

If you think Bitcoin can replace the hidden "black money" in the world, since "black money" is difficult to define, we use "disappearing" US dollar bills as a substitute. The global black money is about 1 trillion US dollars. Assuming that all of it is held in Bitcoin, the value of one Bitcoin is about 48,000 US dollars.

Even if Bitcoin can only achieve 10% of the above three situations, the corresponding value of Bitcoin is 5,000 to 50,000 US dollars, which is much higher than the current price of Bitcoin. > "

The result of the crazy rise in Bitcoin prices is the soaring prices of ASIC mining machines. Take Avalon as an example, its price soared from 8,000 RMB at the beginning to 310,000 RMB at the peak.

As a speculative asset, real estate pales in comparison to Bitcoin.

3.3 Industrial Chain

Most economists believe that the deepening and refinement of division of labor is one of the signs of industry maturity. The development of Bitcoin mining has also verified this view.

After Avalon successfully launched its mining machine, it announced its transformation - open source Avalon's hardware solutions other than chips, but at the same time only selling chips and no longer selling assembled machines.

In fact, Avalon has a reason for doing so. Avalon is developed by 28-year-old "Pumpkin Zhang", a doctoral student in computer architecture at Beihang University. His ability in chip development is unquestionable. However, product sales and customer service are beyond his professional scope.

During the second pre-sale, the Avalon team gave several overbearing user terms:

"Before booking, please be sure to read and agree to the following terms: 1. No refunds will be made under any circumstances. This is because we will use the advance payment to purchase parts, so no refunds can be made. 2. No guarantees. This includes but is not limited to: the risk of no third-party evaluation, the risk that we are scammers, the risk of not being able to ship on time due to objective and supervisory reasons, the risk that bitcoin itself has serious problems and cannot continue to exist, etc. 3. No sales customer service. Due to limited manpower, if you cannot understand the full content of this announcement, please do not buy. At the same time, QQ and Wangwang will not provide booking consultations, and all inquiries will not be responded to. 4. The delivery address cannot be changed once it is determined."

These terms were later criticized by many people. Although the Avalon team proved their credibility by being the first to ship in large quantities, at least at the time, many of their practices were not mature enough in business.

In addition, the Avalon team obviously felt that selling finished products directly to end users also required providing subsequent warranty and other services. Therefore, they decided not to sell finished machines anymore and chose to focus on becoming a Bitcoin mining chip provider.

I think their decision is in line with the social development trend of specialized division of labor and is extremely wise.

Future Outlook: The Ghost of Quantum

A ghost - the ghost of communism - is haunting the European continent.

- Karl Marx. The Communist Manifesto

If practical quantum computers are developed, the cryptographic foundations of Bitcoin will collapse.

Of course, it’s not just Bitcoin that will be affected, but modern computer cryptography as a whole – meaning that banks aren’t immune either.

Maybe many students think that quantum computers are still very sci-fi. However, in fact, the development speed of quantum computers is not inferior to Bitcoin at all.

In 2007, D-Wave announced that it had successfully developed the world's first working model of a quantum computer. At that time, some scientists predicted that it would take at least 20 to 50 years from a model to a machine that could be truly commercialized.

However, it turns out that when it comes to predicting the future, experts are often no more reliable than fortune tellers - in 2011, D-Wave released the world's first commercial quantum computer, D-Wave One, which uses a 128-qubit processor and has a computing speed four times that of its predecessor. Its theoretical computing speed far exceeds that of all supercomputers at the time.

In 2012, the D-Wave Two quantum computer was launched. Its processor has 512 qubits. Its computing power in certain fields can remain leading for a long time. It is priced at 15 million US dollars.

In 2013, Google decided to purchase a D-Wave quantum computer and set up a quantum computing lab. To test the performance of the D-Wave quantum computer, scientists asked D-Wave to run the same task as a traditional computer equipped with Intel chips. In some tests, the quantum computer was nearly 11,000 times faster than the traditional computer.

Of course, it is too early to say that quantum computers will be put into practical use, let alone use quantum computers for mining. Currently, the total output of Bitcoin is only 3,600 per day, which is halved every four years, and a quantum computer is worth $15 million. In addition, the super computing power of quantum computers may trigger a 51% attack, which is also worth worrying about. The so-called 51% attack means that someone has more than 51% of the computing power of the entire network, so he can modify the global bill of Bitcoin at will.

Despite the above concerns, my point is that the future is always uncertain. Sometimes there is no need to worry too much. Smart people will always find smart solutions. Keynes once said:

It is misleading to look at things from a long-term perspective. In the long run, we are all dead.

So if quantum computers are really put into practical use one day, it will be a disaster for Bitcoin, but also a blessing for mankind.

4. Conclusion

Bitcoin, 2013, four years old.

Is its emergence an inevitable result of historical development, or is it just a short-lived concept?

What profound impact will it have on the process of globalization, and what role will China play in it?

Can it take root and rebuild the financial system of human society with overwhelming force, and then influence the world's political landscape?

I think, instead of waiting for an answer, it's better to give one.

Like everything new and vibrant, Bitcoin belongs to young and energetic people.