Problem of PoW 1: Waste of Resources

Iceland is known as a “miner’s paradise”. The temperature there is cold, a computer server can be naturally cooled, and the renewable energy of geothermal and hydroelectric power plants makes the electricity price lower; in that way it attracts bitcoin mining companies from all over the world.

In mid-February 2018, a number of overseas media reported that the electricity used for mining in Iceland in 2018 would exceed the total household electricity consumption of the country’s 340,000 population. A week later, the Elite Fixtures website published an updated bitcoin mining cost survey of that week. The results showed that to mine one bitcoin, the average electricity consumption of Antminer S9 mine was 17,773 kW, the electricity consumption of S7 was 43,889 kW, and the electricity consumption of Avalon 6 was 35,294 kW. A lot of media don’t understand what is Bitcoin mining; they just track the hot spots, as was with the “electricity consumption”. They used the words “shock!” and “terrible!” to emphasize that the consumption of energy for mining was huge.

Bitmain, the leader of the Bitcoin mining manufacturers, has never publicly stated its position on energy consumption. In 2018, I talked to a famous Chinese economist Buer Feimo about mining problems; Mr. Bu’s answer about whether mining power consumption can be defined as wasteful behavior was very simple and sharp: “I spend my own money on the electricity which I want to consume by myself. This is simple consumer behavior. How can it be wasteful?”

The PoW mechanism is also applied by Ethereum, the second-largest cryptocurrency in terms of market capitalization. But the founder of Ethereum, Vitalik Buterin, also hopes to modify the consensus mechanism. When I asked him why, he replied: “I personally feel that PoW wastes energy and has bad influence on the environment. Now the electricity consumption for mining Bitcoin is equivalent to the electricity consumption of the whole Singapore.

And Ethereum electricity consumption currently reaches 30% of Singapore’s total electricity consumption”.

I have forwarded the opinion of the economist about wasting resources to Vitalik Buterin. He refuted in this way: “From social point of view, it is indeed a wasteful behavior. But from the standpoint of miners it is not wasting of resources”.

In fact, if any consumer behavior is raised to the level of the society, the problem will be more complicated.

Problem of PoW 2: Environmental Problem

Last December, CNNMoney reported that some experts said that Bitcoin mining consumes a lot of energy and may be harmful to the environment. For example, meteorologist Eric Holthaus believes that Bitcoin mining is slowing the transition of fossil fuels to renewable energy and eventually consumes more electricity than is available. Environmentalists are not outdone as well, and they are afraid that bitcoin mining will seriously harm global efforts to combat climate change.

In January, Credit Suisse in its latest report mentioned that bitcoin mining is unlikely to cause an “environmental Armageddon”. That report said, “it is a mistake to project miners’ power consumption lineally, as the industry will likely develop hardware and practices that are more energy-efficient in a bid to gain a competitive advantage. The report noted that this phenomenon occurred among both marijuana growers and data center operators during high-growth periods for these industries”.1

Of course, the argument of polluting the environment can provide new business opportunities for the industry. Now companies have begun to research green mining.

Last December, I received an email from the United States. A traditional company said they were researching green mining and asked me to give them contact of Chinese mining machine manufacturers for potential business cooperation. I checked it out at their official website, but I did not find out that they are related to mining business, so I refused their request. In February 2018, I saw a website reporting that a Bitcoin ATM producer is also entering the green mining industry. According to the company, “it is possible to run these machines solely on renewable energy without losing performance”.[1] [2] If you search for “green bitcoin mining” on Google, you can find that many companies have expressed that they can provide green mining solutions, and there is a company who has developed a solar-powered mining machine.

The cost of these green mining solutions is higher than the cost of traditional hydropower or thermal power. Therefore, even if there is a possibility of green mining, the miners will still leave the things as they are.

Problem of PoW 3: Centralization of Computing Power

Bitcoin has experienced hundreds of “deaths” during last 10 years since its birth. Besides from external factors, there can be only an internal cause for the real death of Bitcoin. There is a sword of Damocles hanging over the “head” of Bitcoin and that is “51% power attack”. Here, we can understand the power as a workload. In other words, whoever completes the workload of more than 50% of the entire network, whoever has the whole, decides the flow of bitcoin transactions, establishes new rules, and reaches a new consensus. As it is shown in Figure 2.2, now, only mainland China is a computing power of more than 40% of the entire network.

I have privately teased my friends that the Bitmain is a “mysterious force from the East” which the Western world is not able to understand. How has this mysterious force risen?

In August 2012, Jiang Xinyu (Internet nickname is “fried- cat”) from Chinese Science and Technology University set up a company in Shenzhen. He announced to manufacture Application Specific Integrated Circuit (ASIC) mining machines, and fundraised online through a “virtual IPO” project, which was issued with a price of 0.1 bitcoin. He issued 160,000 shares and promised that those who bought the stocks could be paid with dividends. Wu Jihan, CEO of Bitmain, bought 15,000 virtual stocks. After that, two things happened that made Wu Jihan realize the importance of obtaining bitcoin mining technology.

Bitcoin Hashrate Distribution. (Note

Figure 2.2 Bitcoin Hashrate Distribution. (Note: both Antpool and BTC.com belong to Bitmain.) https://www.mangoresearch. co/understanding-blockchain-tech-cap-theorem/.

In December 2012, “friedcat” called Wu Jihan and told him that something went wrong with the ASIC chip. The problem was solved later, which was a huge relief to Jihan.

In April 2013, Wu Jihan spent several millions for the Avalon mining machine pre-order. But the delivery was not on time to the delivery date. We must realize that miners would suffer great if their mining machines were delayed in shipping while hashrate increases in the network. The result would be disastrous.

After these two experiences, Wu Jihan created Bitmain in May 2013- In the late May of the same year, CCTV’s “Half-hour Economy” reported bitcoin news for the first time and attracted a large number of investors to enter the market, which gave birth to a huge mining machine market. Two months later, there emerged a multiple bitcoin miners: Pigeon, TMR, Biter, Landchip, Bee, Garden, Smart, etc.

In the fierce competition, Wu Jihan’s technical partner Micree Zhan independently developed the first generation of Bitmain Antminer machines SI in less than 6 months after their company had been established. The energy consumption of the same computing power was half less in comparison with the previous mining machine. At the beginning of 2015, Zhan Ketuan developed and launched the fifth-generation Bitmain Antminer S5, which established the leading position of Bitmain in the mining market. Bitmain Antminer machines evolved fast and became a new game changer.

In fact, a close review of the history of the development of Chinese mining machine manufacturers in the early years can show that there is a great similarity with the current ICO boom. There also have been various kinds of chaos such as postponed deliveries, scams, and illegal fundraising, which were checking the credibility of people in the industry. Yang Haipo, the founder of Viabtc, once sighed: “There are a lot of mining machines manufacturers which existed at the same time with Bitmain, but later on they all got into bankruptcy. Mining machine manufacturing requires coordination of procurement, supply chain, logistics and other aspects. The success of Bitmain shows that Wu Jihan is an excellent ‘steersman’ of the company”.

On February 24, 2018, CNBC quoted analytics company Bernstein that Bitmain’s revenue in 2017 was as high as $3 billion to $4 billion, equivalent to Nvidia’s last year’s profit. The Bernstein’s analysts mentioned in their report: “But Bitmain achieved this in merely 4 years, while it took Nvidia 24 years to get here”.[3]

The report “Bitmain madly earned $3 billion, and it rivals Nvidia” has occupied the headlines of various traditional media and blockchain media in China and abroad for a while. This article sparked a discussion about whether the mining industry had a huge profit problem and divided it into two groups with clear positions. One group insisted that Bitmain is monopolizing the mining machine market and is trying to control bitcoin; the other group embraced Bitcoin, emphasizing that this is the result of market competition.

Huang Shiliang (official WeChat account is Lightning HSL), a well-known blockchain educator in China, believes that “the more expensive the mining machine, the better it is. The more expensive is the price, the more it indicates the contribution of Wu Jihan to this industry”. But he also admitted that Bitmain is now a “unicorn” in the mining industry Analyst Berstein estimates that Bitmain occupies a 70%-80% share of the Bitcoin mining machines and ASICS chip market.

For this reason, the community called for the changes in the consensus algorithm, hoping that more miners will participate and break the monopoly of Bitmain.

Can you defeat this unicorn only by modifying the consensus algorithm?

Zhu Fa, co-founder of Poolin, believes that the changes in bitcoin algorithm are a pit: “First of all, if the BTC does not use SHA256 (hash algorithm), then the SHA256 computing power will immediately switch to other currencies with the same algorithm, such as BCH, SBTC. As a result, the BTC holder would be ‘trapped’. Secondly, after the algorithm is changed, basically the first thing is to make a new algorithm for the mining machine. So BTC miner has to re-purchase the mining machine. Miners will suffer losses. Thirdly, if ASIC-unfriendly algorithms are used as Monero and Ethereum do, it will make community resources and value flow towards other currencies, such as Monero and Ethereum. As a result, BTC holders would suffer losses”.

Vitalik Buterin, a founder of Ethereum, tweeted a hybrid PoW/PoS system.[4]

Vitalik wasn't the first to propose this hybrid consensus mechanism of PoW+PoS. As early as in 2012, a geek with pseudonym Sunny King invented Peercoin and first adopted the Proof-of-Stake (PoS) mechanism to maintain network security.

  • [1] https://www.ccn.com/bitcoin-mining-isnt-environmental-armageddon-credit-suisse-report.
  • [2] https://cointelegraph.com/news/green-mining-company-to-reduce-coin-generating-energy-costs-by-harnessing-renewable-power.
  • [3] https://www.cnbc.com/2018/02/23/secretive-chinese-bitcoin-mining-company-may-have-made-as-much-money-as-nvidia-last-year.html.
  • [4] https://www.computerworld.com/article/3299697/what-vitaiik-buterin-tweet-storm-means-for-future-ethereum-blockchain.html
 
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