Bitcoin mining isn’t what it used to be.  Covered Kevin Zhang And Foundry Services A Peek Behind The Bitcoin Curtain The Necessity Of Mining Pools Kevin Zhang And Foundry Services Kevin Zhang is the Vice President of the largest Bitcoin mining pool in the world, Foundry Services. Today, he shared some critical insights as to […] The post Insights On The ‘Brutal, Thankless’ Business Of Bitcoin Mining appeared first on CryptosRus.

Insights On The ‘Brutal, Thankless’ Business Of Bitcoin Mining

Bitcoin mining isn’t what it used to be. 

Covered

  • Kevin Zhang And Foundry Services
  • A Peek Behind The Bitcoin Curtain
  • The Necessity Of Mining Pools

Kevin Zhang And Foundry Services

Kevin Zhang is the Vice President of the largest Bitcoin mining pool in the world, Foundry Services. Today, he shared some critical insights as to what happens behind the Bitcoin curtain and Foundry’s mining pool journey. Many holders of Bitcoin take for granted the work and commitment of the miners in ensuring the Bitcoin network runs smoothly and securely.

First of all, Foundry runs a mining pool. Basically, the only way to mine Bitcoin now is through joining a mining pool. “A mining pool is the pooling of resources by miners, who share their processing power over a network, to split the reward equally, according to the amount of work they contributed to the probability of finding a block.” 

These mining pools began when the difficulty of mining became so computationally intensive that it required miners to pool their resources to generate blocks quickly and receive a portion of the rewards on a consistent basis. The first mining pool launched all the way back in 2010.

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Foundry is owned by Digital Currency Group, which is arguably the most powerful entity in the entire crypto space. While you would presume Foundry would be raking in the dough, Kevin Zhang argues otherwise. Speaking on the journey of Foundry, he mentioned that “with razor-thin margins and extreme luck volatility, the Bitcoin pool business is quite thankless and brutal.”

A Peek Behind The Bitcoin Curtain

As the operator of the mining pool, Foundry, in the past collected fees for their services. However, as competition increased massively in the space, there has been a race to the bottom in fees. So much so that according to Zhang, the Foundry pool “offers 0% pool fees.”

To add to the issues of revenues, there is literally ‘luck’ that is needed to be able to solve the puzzle to mine the block. Sure, the hash rate Foundry generates gives them a chance, but as Zhang points out, institutional pool customers want to be paid in Bitcoin daily, “regardless of the pool’s luck” in winning the next block.

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According to Zhang, a service like Foundry takes on “all the risk” of solving the Bitcoin blocks but is not guaranteed any margin as the transaction fees generated from each block are paid to the customers in the pool. Foundry has to utilize their Bitcoin reserves to “ride out streaks of bad luck”, meaning that if for some reason their pool continues to not solve the puzzle and win the Bitcoin rewards they have to use these reserves to pay out customers.

This brings Zhang to explain: in light of all this, what is the point of operating a Bitcoin mining pool? Zhang essentially chalks it up to altruism. “It all boils down to strengthening and defending the Bitcoin network.” While this sounds nice, we know that the game theory around an economic incentive for miners to protect the network was a critical component of Satoshi’s design. It is important to note that early Bitcoiners didn’t anticipate pooled mining, and when it came to life in 2010, it threw them for a loop. 

“No one anticipated pool mining, so we considered all miners to be full nodes and almost all full nodes to be miners.”  -Theymos of /R/bitcoin

Early Bitcoiners also said that they didn’t anticipate ASICs, which in their eyes  would “cause too much mining centralization.” Zhang’s lament about pooled mining shows that maybe the early bitcoiners were on to something. For example, mining has become so expensive it is well known that if you don’t have access to cheap energy resources, like hydro-power in Alaska, the costs of mining are explicitly prohibitive.

The Necessity Of Bitcoin Mining Pools

Zhang went on to say that capital requirements are a “huge barrier to entry” for large-scale mining. And, echoing the concerns of early bitcoiners, Zhang added that the ASICs, which cost $10k each, are a big part of the problem. Just like GPUs, ASICs require silicon chips that are hard to come by right now. Bitmain essentially has a stranglehold and monopoly on the market.

He does point out that Bitcoin has shown incredible resilience in mining. Mainly when the exodus from China occurred and 90% of the hash rate moved across the world without issue; just a “few difficulty adjustments.” Zhang then goes on to praise what Foundry has been able to accomplish. He mentions how difficult it is to ensure the reliability and security of payments, transparency for the fee structure, and combatting energy FUD by education.

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At this point, Bitcoin couldn’t exist without mining pools, and Foundry is leading the way. However, as touched on above, inherent to pooled mining are fundamental problems. Mainly concerned with centralization. For example, as players like Fidelity get into mining, the mining and hash rate is being usurped by those with more resources and hashing power. Locations with the cheapest energy will also suck up all the miners, and so there is geographic centralization like there was for a decade in China due to the cheap energy there.

As Bitcoin continues to evolve into the behemoth it is already morphed into, it would be a pity if there were just a handle of entities and mining pools that control the all too critical function of mining BTC blocks.

The post Insights On The ‘Brutal, Thankless’ Business Of Bitcoin Mining appeared first on CryptosRus.