A handful of companies and groups of individuals are the experts at mining cryptocurrency.
It is particularly popular in northern countries where electricity is cheap and abundant.
They are “miners”. But they don’t have headlamps or pickaxes, and they don’t work several hundreds of meters underground. Instead, these miners work on gigantic farms filled with servers and are pioneers of crypto mining technology.
Mining technology rising
They spend their days solving complex mathematical problems, which requires significant computing power for the mining technology. The goal? Be the first to find the solution, so as to mine a new “block” that will validate new transactions in virtual currencies and add them to the Blockchain, the register of every past transaction.
For their efforts, miners collect a commission on the transactions they validate and receive the coins that they mined. With Bitcoin, for example, each block created is worth 12.5 Bitcoins. “Commission varies based on supply and demand for miners’ services,” said Charles Hayter, co-founder of analytics firm CryptoCompare. Since about 144 blocks are added to the blockchain each day, mining technology generates nearly $11 million per day. Almost all currencies can be mined, but the ones that are the most popular are Bitcoin, Ethereum and, to a lesser extent, Litecoin and Monero.
Manufacturers and mining technology
In 2009, when only a few specialists find a interest in cryptocurrencies and mining technology. Mainly individuals did it using their personal computers to extract new Bitcoins. It was easy work. But not anymore. Indeed miners quickly began a technological race to have the fastest and most powerful computer.
Hardware manufacturers rose to the occasion, developing specific chips optimized for mining called ASICs (Application-Specific Integrated Circuits). These quickly surpassed individuals’ efforts and devices, which could no longer handle mining technology and extracting cryptocurrency. So Bitmain, a Chinese company founded in 2013, created its range of coins called AntMiner.
It dominates this segment with a 70% to 80% market share, according to Bernstein Bank. But other companies using mining technology are also active on the market. Such as China’s Ebang Communication and Canaan Creative (which are preparing to go public on the Hong Kong stock exchange). As well as Japan’s GMO Internet, Taiwan’s TSMC, the Netherlands’ BitFury and the US’ Nvidia. And the South Korean giant Samsung has confirmed it will soon market its first ASIC coins.
“The material becomes obsolete very quickly, sometimes within just a few months,” said Charles Hayter. “New generations of machines and chips keep coming out.” Given that each machine costs between $800 and $1,100 and an average-sized farm has approximately 1,000 mining technology machines, it becomes very expensive rather quickly.
Mining technology Worldwide
Mining therefore becomes the business of large companies that are able to make colossal investments. Once again, Chinese company Bitmain (currently not listed) is a global leader. Genesis Mining, a company founded in 2014 and based in Hong Kong and Iceland, is another big player, along with Canada’s Hive Blockchain.
Currently, the vast majority of Bitcoin mining (more than 70%) is occurring in China. “Certain provinces such as Sichuan and Inner Mongolia, which have lots of hydroelectric power, are home to gigantic mining farms in abandoned industrial hangars,” said Emin Gün Sirer, Bitcoin expert and professor at Cornell University
For miners, location is quite important. The amount of energy needed to run the powerful mining technology machines is the main cost. As a result, countries with cheap electricity or cold weather – which reduces the need to keep servers cool – are ideal spots. In addition to China, other places such as Iceland, Sweden, Estonia and Quebec are also top mining locations.
Individuals have found that mining technology is no longer profitable, now that they are competing with large companies. The financial aspect is even more problematic given that mining profitability decreases as the number of miners – and therefore competition – increases. “To fight against the exclusive stronghold of companies, individuals have started to come together to gather enough computing power and share costs,” said Campbell Harvey, a cryptocurrency expert at Duke University. But nevertheless, this is Bitmain that owned the two largest mining sites, BTC. com and AntPool.
Mining technology and difficulties
Survive in such a difficult climate is far to be easy. The current mining technology context is favorable to big players and is leading to a concentration of the industry. Some estimates say China’s Bitmain would monopolize nearly 45% of Bitcoin’s mining power or “hashrate”. This is rather ironic, since the idea behind cryptocurrencies was an ideal decentralisation of society.
“It is not a good idea for one single player to hold more than 25% of all resources,” said Sirer. “That player could decide to mine some blocks and not others.
This would lead to the death of certain links in the blockchain, or even of the entire currency altogether.” Furthermore, if a player holds more than 51% of the hashrate of a blockchain, the blockchain’s security is no longer guaranteed. For example, this player may force the network to accept fraudulent transactions.
With this risk in mind, certain blockchains have modified their protocol. Monero, for example, has a mining technology algorithm that is open to all types of processors and ASIC-resistant, in order to encourage as many miners to participate as possible.