June 23, 2018

Does cloud mining make sense?

[Paul Ellenbogen is a second year Ph.D. student at Princeton who’s been looking into the economics and game theory of Bitcoin, among other topics. He’s a coauthor of our recent paper on Namecoin and namespaces. — Arvind Narayanan]

Currently, if I wanted to mine Bitcoin I would need to buy specialized hardware, called application-specific integrated circuits (ASICs). I would need to find space for my hardware, which could take up a considerable amount of space. I might need to install a new cooling system into the facility to dissipate the considerable amounts of heat generated by the hardware.

Or I could buy a cloud mining contract. Cloud mining companies bill themselves as companies that take care of all of the gritty details and allow the consumer to directly buy hash power with dollars. Most cloud mining companies offer contracts for varying term lengths, going anywhere from on the order of weeks to perpetuity. For example, I could pay $300, and receive one terrahash per second for the next year. As soon as the cloud hashing provider receives my money, they start up a miner, or allocate me existing cycles, and I should start earning bitcoins in short order. Sounds easy right?

Cloud mining has a bad track record. Many cloud mining services have closed up shop and run off with customer money. Examples include PBmining, lunaminer, and cloudminr.io. Gavin Andresen, a Bitcoin Core developer, once speculated that cloud mining doesn’t make any sense and that most of these services will end up as scams.

Cloud mining has been a popular front for Ponzi schemes, investment frauds where old customers or investors are paid with the money of new customers. In the case of cloud mining Ponzi schemes, bitcoins to pay old contracts are furnished from the payment of new customers. Ponzi schemes tend to collapse when the flow of new customers dries up, or when a large number of customers try to cash out. Cloud mining is a particularly appealing target for Ponzi schemes because the second failure case, cashing out, is not an option for those holding mining contracts. The contracts stipulate a return of bitcoins determined by hash rate. This means Ponzi scheme operators only need to keep recruiting new users for as long as possible. Bitcointalk user Puppet points out a set of 7 useful criteria for spotting cloud mining scams. Out of the 42 operations puppet examines, they identify 30 operations as scams, 14 of which have already ceased operation.

Yet cloud mining persists. That so many cloud mining operations end up being scams may appeal to our basic business intuition. Compare a cloud miner to a traditional bitcoin miner. A traditional bitcoin miner mines bitcoins and sells them on the exchange at their current market rate. It seems that the only way for a cloud miner to do better than a traditional bitcoin miner selling bitcoins at market price is at the expense of the cloud mining customer. It appears there is no way for both cloud miner and their customer to walk away better off.

Yet cloud mining and at least some interest in cloud mining persists. I would like to offer some possible scenarios where cloud mining may deliver the hashes that customers order.

Hired guns? Papers that propose attacks against bitcoin often pose “An attacker with X% of the hash power could do Y.” For example, in selfish mining, as first described by Eyal et al, with 33% of the mining power an attacker could force the rest of the network to mine on top of their blocks. Cloud miners could be used for block withholding attacks too. An important feature of many of these attacks is that the mining power need not be used all the time. These attacks would require flexibility in the mining software the attackers are using, as most off the shelf mining software (thankfully) does not have these attacks built in. Most cloud mining set ups I have looked at don’t allow for enough flexibility to launch attacks, nor are the contract periods on most services short enough. Cloud mining customers typically have a simple web interface, and in the best case are able to chose which pools they join, but they do not have any sort of scriptable direct interface to the mining hardware. At the moment, cloud miners are probably not supporting themselves by executing attacks for others.

Regulatory loophole? Individuals may try to use cloud mining to circumvent Bitcoin regulations, such as know-your-customer. If I want to turn my dollars into bitcoins, I can buy bitcoins at an exchange, but that exchange would have to know my true identity in order to comply with regulations. Unscrupulous individuals may not want to link their identity and cash flow reported to the government. Cloud mining operators and unscrupulous customers may try to skirt these regulations by claiming cloud mining operations are not exchanges or banks, rather they merely rent computer hardware like any cloud computing provider, meaning they do not need to comply with banking regulation. It is unlikely this would be viable long term, or even short term, as regulators would become wise to these sorts of regulatory loopholes and close. This paragraph is the most speculative on my part, as I am neither a regulator nor a lawyer, so I don’t have expertise to draw on from either of those fields.

Financial instrument? Currently most bitcoin miners take on two roles, managing the mining hardware and managing the financial risk involved in mining. A more compelling justification for cloud miners existence is that cloud mining contracts allow a cloud mining provider to avoid volatility in the exchange rate of bitcoin and the variability in the hash rate. Cloud mining is a means of hedging risk. If cloud miners can enter contracts to provide a certain hash rate to a customer for a length of time, the cloud miner does not need to concern themselves with the exchange rate nor hash rate once the contract begins. It then becomes the job of the customer contracting the cloud miner to manage the risk presented by volatility in the exchange rate. This would allow the cloud miner to specialize in buying, configuring, and maintaining mining hardware, and other individuals to specialize in managing risk related to bitcoin. As the financial instruments surrounding cryptocurrencies become more sophisticated, a terrahash could become another just another cryptocurrency security that is traded.

 

Acknowledgment: I would like to thank Joseph Bonneau for the contribution of “cloud mining as a means of managing risk” concept.

Comments

  1. Chris Camp says:

    one other thought: Cloudvoting

    Mining, via the consensus mechanism, offers an opportunity for an individual/group to promote a specific technical or political agenda by way of using their hashing power as a vote.

    Take the block size debate. Some miners are expressing their position by writing it into newly mined blocks. But this ‘voting’ capability is only available to solo miners or mining pool operators. Members of a mining pool could indirectly vote by redirecting their hashing power to a pool that better aligns with their interests, but it’s conceivable that a cloudmining operation could allow users to cast ‘votes’ on any issue in proportion to the hashing power they have contracted for.

    This approach would give anyone with an interest in influencing the future of Bitcoin (or any PoW blockchain) by voting their hash-shares. It’s a product I’d personally be interested in and I think it’s the future of Bitcoin.

    Along these lines, cloudminers might also gain control over other aspects of the system, soft-coded changes (what size blocks they are willing to process, what types of TXs they will include in blocks, etc…) and operational decisions (location(s) of mining farms – aiming for geographic diffusion or specific legal environments to increase resilience). Each of these choices has economic and political implications.

    And there are people who are unwilling to solo mine, but still want to influence Bitcoin via mining. Cloudmining, in a marginal way now and perhaps more so in the future, offers a way of giving this power to more people.