April 24, 2014

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Bitcoin grows up, gets its own hardware

The big news in the Bitcoin world is that there are several Bitcoin-mining ASICs (custom chips) already shipping or about to be launched. Avalon in particular has been getting some attention recently. Bitcoin mining moved long ago from CPUs to GPUs, but this takes it one step further. The expectation is that very soon most mining will be done by such specialized hardware; general-purpose machines will be too inefficient to be profitable. This development raises a whole host of interesting questions.

First, if ASIC mining is indeed so much faster than any current method, and can recover the hardware cost in just a few days as claimed, why are the creators selling them, or even talking about them?! Why not keep the existence of these devices a secret and mine as much BTC as possible before the world catches on? After all, the costs of packaging and distribution will only decrease the margins. There are several possible explanations:

  • Maybe the buyers are people who have lower electricity costs (which is a significant fraction of total cost of mining over say a two-year period).
  • There is a claim in this thread that the creators of Avalon could only raise money for manufacturing by pre-selling the units.
  • Another reason from Butterfly Labs, one of the ASIC companies: “we believe the best way to secure bitcoin and help it to succeed is to get as much product out to as many people as widely as possible. That makes it exceptionally difficult, if not impossible, for any individual, corporation or hostile government to destabilize and wreck Bitcoin from within.” This refers to the “51% attack.” Given the speed of the Avalon chip, for example, only about 300 would be needed to exceed the current hashrate of the Bitcoin network!

None of these reasons are fully convincing to me. In fact, one of the companies, ASICMiner, decided to use their machines in-house for mining, and tried to raise capital for manufacturing by selling shares in the company via a Bitcoin stock exchange, with amusing results that you can read about in the same Bitcoin magazine article linked to above.

The second question that comes to mind is: what does a dramatically better mining technology do to the value of Bitcoin? Note that it’s not like the market is being flooded with Bitcoins. All this horsepower doesn’t mean mining is happening any faster — the system automatically and continually adjusts the mining difficulty so that Bitcoins are produced globally at a constant rate. As a side effect, the amount of BTC that a person or entity can mine is determined not by their absolute computing power but by the fraction of global bitcoin mining resources that they control.

My speculation is that the shift to ASIC is good news for Bitcoin’s price inasmuch as it is a signal that people are taking it seriously, just as the price spiked after a hacker demanded ransom in Bitcoin. The fact that these custom chips are useless for any other computing may be particularly meaningful here. News about ASICs has been coming out for the better part of a year; I wonder if it’s possible to see the effect of an individual piece of news on the price.

The “uselessness” brings me to my third point: is there a way to re-design Bitcoin so that the proof-of-work computations have a useful side effect — say protein folding — in essence making Bitcoin mining a massive grid computing project? This has been proposed repeatedly on forums and in blog posts, but my intuition is that it is not possible, that proof-of-work derives its effectiveness precisely from its uselessness. That said, given how much electricity is being spent on Bitcoin mining, it would be good to have a definitive answer.

Comments

  1. paul says:

    The trick would not only be to redesign Bitcoin so that the proof-of-work computations had a useful side effect but also so that the side effect was incapable of leaking information back to the mining work. Otherwise (metaphorically speaking) someone with access to the results of x-ray diffraction studies might be able to temporarily corner the new-bitcoin market.

  2. Paul Troon says:

    The “useful side effect” of bitcoin mining is that it secures the bitcoin network against double spending or creation of bitcoins faster than the agreed rate. From a miner’s standpoint, the primary effect is to sometimes produce bitcoins for the miner.

    Securing the network is a real and tangible benefit and should not be underestimated. There is no equivalent security on any other store of value that could be used as money. Except perhaps metals, which have a fixed mining rate, all other stores of value are created at a rate controlled only by the whim of politicians. paul

    • paul says:

      This points out, by the way, a longstanding issue with stores of value, namely that any value a store-object may have unrelated to its primary role as a store seriously compromises that primary value. Any time the value of bitcoins (or gold or dilithium or quatloos) goes up or down because of extrinsic fluctuations in supply or demand, it ceases to be a store or value and becomes instead a commodity to be speculated in (with the usual incentives for manipulating the value to extract profit).

      • Paul Troon says:

        What is your point here? All stores of value will be effected by extrinsic fluctuations in market based supply and demand, that includes: fiat dollars, farm land, gold, etc. Any store-object that can not be widely traded and acquire a market based price relative to other trade goods is a poor store of value.

        Market manipulation can occur in any market that lacks information transparency and/or market depth. Lack of market depth is a fair criticism of bitcoin, but transparency is in many ways greater than for dollars, gold, etc.

        • paul says:

          My point is that, in general, you want a store of value that doesn’t have a lot of other uses, because you run the risk of misallocation. The gold standard (when it was in force) was a perfect example, because nonmonetary uses (jewelry, dentistry, electronics) were constrained by the rules necessary for monetary uses.

  3. Lori says:

    First, if ASIC mining is indeed so much faster than any current method, and can recover the hardware cost in just a few days as claimed, why are the creators selling them, or even talking about them?!

    That does seem a little infomercialish, doesn’t it? Admittedly, to me the whole bitcoin concept looks like a pyramid scheme, or at best a tax dodge.

  4. simon says:

    “Why not keep the existence of these devices a secret and mine as much BTC as possible before the world catches on?”

    A secret is something we or the majority don’t know, however the hashrate distribution gives a picture. If majority find out about secret ASIC mining by the sellers, that would undermine Bitcoin’s reputation as money-of-the-people. Bad reputation causes lower exchange rate, which is bad for secret miners and sellers, so it’s in their own interest to be transparent.

  5. tradertimm says:

    I find it odd that the “Why doesn’t hashing do something useful” gets so much traction.

    It is useful, it secures the block-chain and enforces the rules that make bitcoin what it is. You don’t have people complaining that a word processor program isn’t using its spare cycles to render “useful” 3D objects, or that a car isn’t using its spare horsepower to fix potholes.

    Useful work is happening, even if it is perceived as repeated calculations doing “nothing”.

  6. dan says:

    1. I am new to Bitcons, and still don’t a lot of the technology.

    2. I do understand greed, and corruption though.

    3. If these ASIC machines, or even gpu mining machines make Bitcoins at a profitable level. China, Iran,
    or any country would huge rooms filled up these machines?

    4. Upfront costs–come on–most criminals have so much money they don’t know how to spend it.

    5. The cost of electricity–Solar works great and is cheap if not contracted out. The only drawback with solar
    is the batteries at night, but there’s ways around that if you have a lot of disposable income.

    6. If Bitcoins were the future, wouldn’t they be the panacea for hiding income?

    7. If just as confused, as when I started–maybe that’s the point?

    • dan says:

      typos–ugh 1. I am new to Bitcons, and still don’t a lot of the technology.

      2. I do understand greed, and corruption though.

      3. If these ASIC machines, or even gpu mining machines make Bitcoins at a profitable level. China, Iran,
      or any country would huge rooms filled up these machines?

      4. Upfront costs–come on–most criminals have so much money they don’t know how to spend it.

      5. The cost of electricity–Solar works great and is cheap if not contracted out. The only drawback with solar
      is the batteries at night, but there’s ways around that if you have a lot of disposable income.

      6. If Bitcoins were the future, wouldn’t they be the panacea for hiding income?

      7. If just as confused, as when I started–maybe that’s the point?