Today, Slush Pool celebrates the 10-year anniversary of the first block the pool ever mined, Block #97834. It has been an incredible decade, and we’re proud to have mined over 1.25 million BTC since then.
However, this is not going to be some feel-good reflection on the past 10 years. Rather, this piece is going to focus on our vision for the next 10 years, because this will be the decade that determines whether Bitcoin mining can remain meaningfully decentralized as publicly-traded companies, energy producers and even major governments become increasingly involved in the mining industry and the greater Bitcoin ecosystem. In fact, it’s important for people to know that this transformation is already taking place at a rapid rate. Amanda Fabiano, head of mining at Galaxy Digital, explained how miners at different scales are gaining access to cheap power, “from small-scale, off-grid miners using waste gas from oil and gas fields, to large-scale miners who own their underlying infrastructure with the ability to take advantage of power arbitrage, to energy producers beginning to ask questions about bitcoin mining.”After the sustained bear market of the past couple years and the most recent Halving in May, the miners who remain operational today are here for a reason. As Fabiano put it, “The mining industry has graduated from its elementary school years and miners are entering into a new wave of professionalism with creative solutions to meet their goals.”In the rest of this article, we’ll tell you about how this industry-wide professionalization is impacting us and our plans to adapt and solve some of the biggest problems that miners still face today.The Market Is Changing, And So Are WeBack when Slush Pool was founded, the idea of a mining pool was quite straightforward: Many small miners aggregate their hash power to reduce the variance with which they earn rewards. The larger the market share of the pool, the lower the variance should be for its miners.Today, this isn’t how most pools operate. The typical pool’s value proposition is no longer lower reward variance (i.e., less time between rewards), but instead it’s essentially no variance (i.e., continuous rewards). Miners submit proof of work to pools in the form of shares (hashes that are relatively close to the difficulty target), and pools pay for each share, regardless of when the pool itself finds blocks. This reward scheme is called pay-per-share (PPS), and it effectively makes pools hash rate buyers, moving all of the short-term variance risk from miners to pools.Not only that, but the competition between pools is so fierce that medium- and large-scale miners are able to negotiate extremely low fees, such that there’s very little money to be made even with a PPS offering. Meanwhile, the risk is enormous.With PPS becoming increasingly common, pools throughout the industry are being driven toward vertical integration — diversifying revenue streams by offering other products to miners besides just the pool. We at Braiins, (the company operating Slush Pool since 2013), have vertically integrated through Braiins OS+, an ASIC optimization firmware which helps miners boost the performance of their hardware by 20 to 30 percent. Moreover, that is just one part of our future.The Commodification Of Hash RateThe trend that we believe will define the next 10 years of Bitcoin mining is the commodification of hash rate. Put simply, enterprise mining operators want to reduce risk and get stable, predictable cash flow just like traditional businesses. That’s currently what they are lacking.Of course, PPS payouts stabilize BTC revenue for miners in the short term. What PPS does not do, however, is reduce long-term risk due to the volatility of two other variables: BTC price and network difficulty.Leo Zhang, founder of Anicca Research and an industry leader on the topic of hash power financialization, categorized the current landscape as being at a crossroad, saying that “it’s a billion-dollar ecosystem built on top of highly industrialized individual operations. Meanwhile, the miners rely on very primitive tools for risk management, and therefore bear lion share of the market risk.”As long as miners are paying their electricity bills and other costs in local fiat currency, BTC price volatility has a significant impact on cash flow. A large price drop can turn a profitable ASIC into a useless money burning machine in the blink of an eye. Similarly, a steep upward difficulty adjustment can increase a miner’s cost of production above the threshold at which it’s profitable. With miners making multi-million dollar capital investments into ASIC hardware that can take many months or even years to produce a positive ROI, the exposure to price and difficulty risk is extreme. It’s basically proof of stake built into proof of work.
For miners, reducing exposure to this risk is a clear requirement. Zhang also sees this trend taking shape, adding: “Similar to how capital markets developed for traditional commodities producers, it’s a natural next step for Bitcoin mining to have its own auxiliary instruments to help miners better manage risks.”In fact, since late 2018 we’ve been working on building a platform to help them do it: a transparent hash rate exchange where buyers can purchase hash rate from miners and speculators can trade derivative contracts on the future value of hash rate.In 2021, Braiins will pivot from primarily operating the pool to a stronger focus on facilitating hash rate exchanges, both instantaneously through a spot market and long-term through forwards and futures markets — enabling miners to lock in fixed returns for their hash power for the duration of the contracts.This is the final piece of the puzzle that will make mining Bitcoin similar to producing any other commodity such as oil, corn or gold. How Stratum V2 Can Play A RoleMiners are often made out to be purely profit-driven operators who don’t actually care that much about Bitcoin and just create constant sell pressure in the market. In our experience, this is far from reality. Many miners are long on Bitcoin, and keep profits in BTC rather than selling all of their revenue into fiat.A good example of this long-BTC miner profile is Great American Mining (GAM), which helps oil and gas producers reduce vent and flare (methane emissions) by consuming their waste gas to power ASICs. Marty Bent of GAM said that they are “proud to be contributing to the geographical distribution of hashrate production.” We know of many other decentralization-conscious miners like GAM.The long-BTC demographic of miners are who we envision being the early adopters of Stratum V2 job negotiation (allowing miners to choose their own transaction sets instead of only pools doing it). However, one of the more interesting aspects of emerging hash rate markets is that they redefine who can be a “miner” in the first place. Bitcoiners and Bitcoin businesses that don’t have deep knowledge of the oil and gas industry or connections to a hydroelectric dam operator will be enabled to contribute to the geographic distribution of hash rate for the first time since the pre-ASIC era by buying hash rate and using Stratum V2. There’s no guarantee that anybody will actually take this opportunity, but it’s nonetheless one worth enabling, given the inevitability of hash power’s commodification. Bent summarized nicely how this can shape a bright future, explaining that “more mature derivatives markets will allow us [at GAM] to hedge operational risk and Stratum V2 will reduce the risk of mining pool centralization as an attack vector for Bitcoin.”The Show Goes OnAs we celebrate a decade of adding blocks to the Bitcoin blockchain, we want to thank all of the miners who have been with us over the years, from the early days with a single server in Slush’s office to our 30-plus member Braiins team led by Jan Čapek and Pavel Moravec today.Looking at the changes ahead, we’re excited by the opportunity to reinvent ourselves and adapt alongside other mining businesses as the financialization of hash power takes place. Cheers to the next 10 years of building in Bitcoin, and to the miners that make it all possible.