The rise and fall of Bitcoin mining

Individual Bitcoin miners are being driven out of the market by powerful mining pools.

Earlier this month, ventilatoren of Bitcoin—the world’s most popular digital currency—were caught te a whirl of funk spil one group threatened to corner the market for fresh bitcoins.

GHash.io, a Ukraine-based collective of Bitcoin miners, recorded a massive spike te its computing power. Almost overnight, an organization that didn’t exist spil recently spil last summer, all of a sudden managed 42 procent of all the world’s capability to create bitcoins.

Reading influential forms like Bitcointalk.org and Reddit’s r/bitcoin pagina that day, one would be forgiven for coming to the conclusion that the development signaled the imminent collapse of the Bitcoin economy. Some went spil far spil advocating for commencing a distributed denial of service attack (DDoS) on GHash, aimed at temporarily crashing the group’s servers, spil a form of protest against the organization’s dominance.

The fear wasgoed overheen something called a “51 procent attack.” An entity that controls overheen half of the processing power on the entire Bitcoin network can use that power to engage te a entire mess of shenanigans, like getting away with spending a single Bitcoin an infinite number of times, or preventing other Bitcoin users’ transactions from going through. At 42 procent, GHash wasgoed brief of the total amount it would need to cause serious trouble, and the group has since taken steps to druppel its processing power down to an even less menacing level.

The collective backlash to the incident, however, is indicative of a creeping unease about powerful mining pools. The pools are a group of secretive organizations not only responsible for the creation of almost every Bitcoin that comes into existence,but also for organizing the more than 60,000 Bitcoin transactions that occur every single day.

The largest Bitcoin mining pools are multimillion dollar businesses, and their operators have become some of the most powerful individuals within the world of cryptocurrency. Their seemingly unpreventable rise may be one of the best examples of how a system held up by its techno-libertarian boosters spil joyously anarchic and decentralized is becoming increasingly formalized, structured, and dare wij say, corporate.

Jeff Garzik may be the textbook definition of a Bitcoin early adopter. After reading a Slashdot article about the currency ter mid-2010, he dove head-first into the world of virtual currency. He joined Bitcoin’s core development team, a puny group of programmers who worked tirelessly to improve the technical integrity of the Bitcoin network. Te the early days, he sent software patches directly to Satoshi Nakamoto, the enigmatic and pseudonymous creator of the currency who straks vanished without a trace.

“I wasgoed one of the very first people te the U.S. to get specialized hardware for Bitcoin mining,” Garzik boasted with a sly chuckle. ‟At very first, I wasgoed able to use it to mine with some success, but eventually it would take mij four weeks before I everzwijn solved a block. And that wasgoed if I got fortunate.”

The difficulty Garzik faced te mining on his own, even te those early days using the most cutting-edge hardware available anywhere, is a flawless example of why solo mining wasgoed roped to become a fool’s errand.

Nakamoto’s 2008 verhandeling outlining the the concept for Bitcoin wasn’t the very first time someone had proposed creating a decentralized virtual currency, but it wasgoed the very first time anyone had come up with a good solution to the problem of dual spending. If a Bitcoin is, te reality, just a opstopping sitting on a hard drive somewhere, what’s to prevent someone from making five copies of that verkeersopstopping and then sending it to five different people, disingenuously telling each recipient their copy is the only one? Without a way to independently verify the legitimacy of each transaction, the factor of scarcity necessary to fasten a real-world value to a string of ones and zeroes flies out the window. Bad money pursues out the good and the virtual currency becomes instantly worthless.

Nakamoto solved this problem by creating a public ledger, called the blockchain, into which every Bitcoin transaction te existence is recorded. Adding fresh pages, called “blocks,” to that ledger requires computational powerful lifting from computers connected to the Bitcoin network. Ter order to entice people to do this work, Nakomoto proposed a process of validating transactions, dubbed ‟mining,” where all computers on the network running a specific lump of software rival to solve a complicated mathematical equation. The very first person to publish the keurig response “discovers” the block and gets to collect the brand fresh bitcoins.

Because there’s a limited amount of space ter each block, such that the entire worldwide Bitcoin network can only treat seven transactions each 2nd, people can tag on an extra toverfee on their transactions to entice miners to waterput their transaction te the next available block and avoid possibly having to wait. Thesis extra fees are added onto the bounty received by the person who detects the block.

Mining is a zero-sum spel. While every mining pc connected to the network is attempting to solve the next block, only one of them will actually be rewarded for accomplishing the task. The result is a technological arms wedloop, with miners aiming utterly specialized, utterly high-powered rekentuig systems at the problem ter an attempt to get there very first.

Spil more computing power is waterput to the task of discovering fresh blocks, the difficulty of the problems those computers are required to solve rises correspondingly:

Spil the price of a Bitcoin increases, mining becomes more attractive spil a money-making activity, which leads to more people wanting to get into the mining spel. But spil more people join the network, mining becomes more difficult, necessitating people to spend more on mining hardware, which further increases difficulty of mining. This cycle goes on forever until the field becomes so competitive that it’s difficult to get a come back on any investment ter mining hardware.

The solution to this problem is collective action—hooking up with a large group of other miners to form a pool.

“Mining bitcoins is analogous to buying lottery tickets. Solving a block is like winning the lottery because a lotsbestemming of it is essentially random,” Garzik explained. ‟Having more laptop power is like buying more lottery tickets. Joining together ter a pool is like a entire bunch of people throwing their lottery tickets into a big pile and divvying up the spoils if anyone the group comes up with the winning number.”

Since running the equipment required to effectively mine Bitcoin (and keeping it cool enough to prevent overheating) requires a large amount of power, pools permit miners to maintain a sustained flow of income and make a rational cost-benefit analysis of whether mining is going to be a money-making or money-losing proposition.

The realization that pools were the ideal way to structure mining klapper the Bitcoin community ter a wave. The very first pool, a French operation dubbed Slush’s Pool , opened for business te late 2010. The following year eyed the creation of Legal more.

“Pools are an unpreventable result of the way Bitcoin wasgoed set up,” Garzik said. ‟If you want a constant income stream, you have to organize mining this way.”

The necessity of Bitcoin mining pools

When Peter Leurs embarked Triplemining with a few friends ter 2011, the primary aim wasn’t to make money.

Just spil being rewarded with freshly minted bitcoins is merely an inducement to coax people to actively maintain the network, Leurs argues his Belgium-based mining pool is a labor of love aimed at protecting the network, rather than a pathway to earning virtual millions:

“We presently operate our pool spil a hobby, and wij do it out of ideology,” he told mij. “We’re not making any profits on our pool, wij can hardly pay for the five servers wij are presently operating to run the pool (and that’s excluding the backup servers). Wij are putting tons of energy ter treating support mails and working on our servers just to keep our pool up and running. Wij’re all doing this unpaid and after our full-time day jobs. Other pools are ran by people doing this spil a full-time job spil they earn enough of profits by running the pool (or indirectly by selling related services). Wij are doing this spil a hobby, to ensure that Bitcoin remains decently protected.”

Triplemining only has about 1,000 users actively mining on a regular onderstel, but they’re able to detect a block every few days. At the current exchange rate, that single block could be cashed out for just overheen $22,000 U.S. Divided a thousand ways, that’s not a thick amount of money—not enough to retire on, certainly—but it covers the cost of running the machines and justifies having to wake up at 4am every so often when the system crashes.

While Leurs’s pool is essentially a passion project, there’s no mistaking the larger pools for anything other than big businesses thirsty for growth with an eye toward the bottom line.

‟The pool size matters. The larger the pool, the more blocks will be found, and the more stable your payouts will be,” Leurs explained. ‟However, te the long run, the chance of finding a block is equal for everybody, and all pools should prize the same payout on average te the long run. There is a ondergrens critical mass, however, if your pool is too puny, then people will abandon it if it doesn’t find any blocks te a reasonable time.

“Most people want daily payouts, so larger pools do attract more people. This is unfortunate, spil more diversity ter the pools is better for Bitcoin ter the end.”

Since the mining software permits individual miners to switch inbetween pools with a click of the mouse, it’s ordinary for people to stir from one pool to another. GHash, the pool whose power wasgoed so enormous it posed an existential threat to the currency, is less than six months old. GHash grew so quickly thanks to its relationship with another company, Cex.io.

The success of Cex, which is run by the same people who manage GHash, is predicated on the assumption that there are a loterijlot people out there who see Bitcoin mining simply spil an investment voertuig. If all you want to do is spend money on a mining equipment and then reap the prizes, a loterijlot of the technical challenges that come with it abruptly seem like unnecessary headaches. Cex lets people effectively rent mining hardware they never have to see or actively overeenkomst with. If someone hires Cex to mine te their name, the only problem they’ll have is how to spend their money.

Spil both the value and public profile of Bitcoin has skyrocketed overheen the course of 2013, an ever-growing number of people abruptly spotted Bitcoin mining spil the closest they’d everzwijn get to legally printing their own money. Cex turned out to be the simplest way to get there. Until the uproar earlier this month, when the massive backlash compelled the company to switch its exclusivity policy, all of Cex’s processing power wasgoed poured directly into GHash.

Leurs worries that services like Cex could ruin Bitcoin’s individualistic ethos. ‟For mij the real problem is …[Cex]. People rent hashing power, so they basically give a lotsbestemming of money to one company to obtain a large quantity of mining power,” he said. ‟Should GHash everzwijn misuse their position, people can react by switching their miner not to point to that pool, quickly penalizing them for their manhandle. However, with Cex, all the mining power is centralized te their gegevens center. Should they everzwijn determine to manhandle their … power, there is much less wij can do, spil the [mining power] is under their onmiddellijk physical control. I therefore strongly recommend for miners to not rent hash power, but run their mining equipments themselves.”

Leurs insists he isn’t accusing Cex or GHash of any wrongdoing because, at the end of the day, their business proefje depends on a very large number of people putting their trust ter the security of the Bitcoin network. Any activity that compromised that network would only harm Cex te the long run. However, te light of prior accusations that GHash engaged ter double-spending shenanigans at a Bitcoin gambling webpagina, there’s a sense that further centralization of mining operations creates a larger chance for someone to cause trouble.

While the 51 Procent Attack is a well-known problem te the community, there’s already evidence that miners will commence streaming out of a pool spil soon spil it comes perilously close to hitting that magic number. However, some have speculated a far lower processing power threshold is necessary for a pool to begin gravely undermining the system for its own individual build up.

Last year, a pair of Cornell pc scientists described something they called a ‟selfish-mine” attack. Using a elaborate strategy of selectively waiting to notify the network about the blocks they’ve solved, powerful pools can spel the system to earn a significantly greater share of fresh bitcoins than their pc power would typically permit. This trick basically leads other pools to waste time attempting to find blocks that have already bot located, while the “selfish miner” reaps all the prizes.

While author Emin Gun Sirer admits there’s no hard evidence anyone has actually attempted this tactic, a group’s capability to successfully carry it out grows spil its size increases. ‟Above 33 procent, selfish miners do not need to wedloop against the other pools, their sheer size means that they themselves will be able to go after up on their own blocks and earn excess profits,” he explained.

GHash and Cex didn’t react to numerous requests for comment.

This tight-lipped attitude is common among mining pools, especially toward the larger end of the spectrum. The Daily Dot reached out to overheen a dozen groups but only received responses from two of them. ‟I think that there is truly no incentive for thesis pool operators to talk to the media,” speculated Daniel Cawrey, a contributing editor at the indispensable cryptocurrency news webpagina CoinDesk . ‟For many countries, mining is ter a gray area policy-wise, and thesis pool operators are doing fairly well financially staying out of the limelight.”

Despite having just scored a major victory for Bitcoin miners across the United States, Russ Smith wasn’t particularly enthused about his own future spil a virtual currency creator.

Last year, Smith, who runs the consulting hard Atlantic City Bitcoin, sent a letterteken to the U.S. Treasury Department asking for clarification on whether individual Bitcoin miners had to register spil money transmitters. Ter December, the Treasury responded by announcing miners were not money transmitters and therefore don’t have to leap through a litany of hoops like carrying high levels of insurance and subjecting themselves to regular audits. Many smaller miners feared the costs of meeting thesis requirements would waterput them out of business.

Even so, ter an vraaggesprek a few weeks straks, Smith admitted he had strongly considered getting out of the mining spel altogether. Despite the regular income pools provide, he complained that cracking even on mining is an increasingly difficult proposition for anyone but the largest players. “More people who have struck out on their own te Bitcoin mining recently have lost money recently than made money,” he said with a breathe.

He added that securing the specialized equipment necessary to rival has become a hassle. “It’s very hard to get Bitcoin mining hardware thesis days, you pretty much have to build it yourself,” he said. ‟The companies have no incentive to supply units that they can operate themselves. Many companies didn’t produce at all and some have disappeared with the money…. Why should a vendor sell you a chunk of equipment that they can just ass-plug te themselves and begin making money?”

Ter a sense, miners like Smith are victims of their own success. Through mining, they’ve maintained the health of a network that needs their hard work to sustain. Te comeback, they’ve bot rewarded with an asset that’s quadrupled ter value te the past six months alone. But that increase has brought an influx of fresh people who see mining less spil an chance to make history than spil a way to make money. Thesis fresh entrants have professionalized the industry to a point where it’s scarcely recognizable to the handful of gearheads who plugged their huis computers into the system back when Bitcoin wasgoed a secret club known only to a select few.

To hear Cawrey, the CoinDesk editor, tell it, the rise of the pools wasgoed an unavoidable result of that professionalization. ‟While it’s making the network more powerful … the level of concentration of thesis major players is a concern,” he insistsed. ‟Years ago wij had a lotsbestemming more banks ter the United States than wij do now and that consolidation has created a loterijlot of problems. I’m not telling its a ideal analogy, but I’m afraid something like that could toebijten to Bitcoin.”

Illustration by Jason Reed

Aaron Sankin

Aaron Sankin is a former Senior Staff Writer at the Daily Dot who covered the intersection of politics, technology, golden retrievers who know how to dunk, organizations adapting to our increasingly connected world, online privacy, the role of harmonie memes te popular culture, Twitter bots, and that same golden retriever who (spil it turns out) is also pretty good at lacrosse. He lives ter Seattle, Washington and became a reporter at the Center for Investigative Reporting ter 2018.

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