Innovation First: Shaping a New Trajectory for the Future of Bitcoin Mining

By Nangeng Zhang, CEO & Founder of Canaan

It is hard to imagine that it has only been over a decade since Bitcoin’s genesis block was first mined. As a significant milestone in the fringes of the financial world, cryptocurrencies have gradually entered mainstream consciousness, captivating institutional investors and banking institutions alike. However, in the world of advanced technologies, ten years is hardly any time at all. As cryptocurrencies entered mainstream discussions and blockchain gradually cemented itself in a new phase of maturity.

As the cryptocurrency space gradually made its way out of the bear market of 2019, a pandemic struck, debilitating the entire global economy with March 2020 seeing one of the worst days in the history of the stock market. With both crypto and fiat currencies alike impacted by widespread sell-offs, a second bear market seemed imminent. Yet, the past few months have offered a renewed sense of optimism with bitcoin prices on the rise once again, surging to an all-time high of $19,857 for the year. Whether or not the ongoing price rally will see continued momentum beyond 2020, we’ve continued to see the network hashrate surging in parallel with growing demand for bitcoin mining machines. For the ever-growing bitcoin mining ecosystem, this certainly spells a promising end to the year.

Indeed, the past decade has seen the bitcoin mining industry grow at breakneck speed, experiencing groundbreaking highs and lows. Alongside price fluctuations and significant technological breakthroughs, the emergence of new mining hotspots has allowed the sector to flourish, bringing about intense competition among independent miners and professional mining farms alike. Meanwhile, as the bitcoin mining community looks to the future, it will need to address the blockchain industry’s gradual transition away from crypto mining. With next-generation projects as well as legacy blockchains such as Ethereum opting for consensus models such as Proof-of-Stake (PoS) which are not dependent on computing power, where does that place the crypto mining sector?

As we enter the new year full of promise, what then lies ahead for the future of bitcoin mining as the industry continues on its path of innovation?

The promise of novel jurisdictions

Home to comparatively cheaper electricity and decreased production costs, China has long maintained its standing as the most prolific jurisdiction for bitcoin mining. According to the University of Cambridge’s Centre for Alternative Finance, 65 percent of the world’s bitcoin hash power continues to flow from the country. Yet, as the bitcoin mining race heats up, what’s most important for pole position would be a mining-friendly government with stable regulations around cryptocurrencies and sustainable energy resources that are also low in cost.

Gradually, countries such as the U.S., Russia, and Kazakhstan have started to make their mark in the bitcoin mining industry, coming in just behind China in terms of bitcoin hashrate distribution, with the three countries hovering around the 6 to 7 percent mark. Though the gap is wide, these markets have shown a great deal of potential. North America, for one has proved its price competitiveness when it comes to cheap electricity — Texas comes to mind, with electricity costing less than $0.02.

Meanwhile, far-flung locations such as Kazakhstan are distinguished by the vocal institutional support offered by government ministers. Most recently, the country’s Digital Development Minister stated that negotiations were ongoing to secure investments of approximately US $714 million in the local cryptocurrency mining sector in the coming years in order to diversify its oil-dominated economy. Perhaps most attractive to cost-conscious miners is Kazakhstan’s cheap sources of power that are also not prone to volatile fluctuations in electricity prices. Though initially denoted for its tax-friendly stance on crypto mining, a recent government proposal is looking to impose a 15 percent tax on all mining activities as a form of funding countermeasures to mitigate the economic impact of Covid-19 in the country. Nevertheless, the market’s ambitions to become a top-3 crypto mining destination seem promising.

As bitcoin’s rebound prompts increasing demand for mining operations and interest in digital assets from institutional investors continue to grow, these new markets are certainly ones to watch, as the space continues to diversify and seek out promising opportunities beyond the Great Wall.

The power, performance, and price trilemma

Beyond the “where” of crypto mining, there’s also the “with what” — namely, the tools and hardware that miners have at their disposal. In looking to the past, it’s clear that the introduction of ASIC-based mining rigs largely catalyzed the commercialization of the bitcoin mining industry as we know it today. No longer limited to general purpose hardware such as GPUs, CPUs, and FPGAs, the application-specific nature of ASIC miners allows for optimized power and performance. 

As bitcoin mining became increasingly lucrative as prices rose and transaction fees increased, the competitive state of play in hardware development equally grew. With more players involved, mining equipment manufacturers began to bring to market newer, faster, and more powerful machines. From 2013’s 130nm to today’s 7nm, the industry started to compete on chip size for increased mining efficiency.

Yet, this year’s growing hashrate — nearly a 30 percent increase — has seen miner revenues decline as farms take out loans to fund the latest and greatest ASIC-based mining equipment. With the majority of hardware manufacturers continuing to pursue ASICs as the gold standard for crypto mining, what we’re likely to see is ongoing innovation in this arena.

With technological progress slowing, miners have started to turn to energy alternatives in order to maintain a competitive edge and maximize profits. Sustainable and renewable sources of energy have increasingly become an area in which miners leverage to gain greater competitive advantage. Not only would sustainable crypto mining reduce the environmental impacts in an energy-intensive industry, but also provide cost-efficiency. Take for instance the use of hydropower, in particular from countries who experience long periods of wet seasons or have a cold climate. Here, miners would be able to leverage renewable sources of energy generated from hydropower plants all at low cost, thereby bringing about greater cost-efficiencies.

Innovation at the heart of bitcoin mining’s evolution

But at its core, perhaps the greatest existential threat to bitcoin mining stems from the industry’s gradual shift towards PoS. Largely catalyzed by the growth of Decentralized Finance (DeFi), the space has seen significant growth, with approximately $360 million worth in bitcoin moved to Ethereum this past October. Compared to Bitcoin’s Proof-of-Work (PoW) consensus model, proponents of PoS have long emphasized its comparatively less environmentally-intensive operations and perceived equitability. The true test of PoS will be Ethereum’s transition to its new consensus model and only time will tell if other legacy blockchains will be prompted to follow suit.

Technologies such as quantum computing have also been touted as the next big thing after bitcoin. Initial research has shown that quantum computing may potentially be able to crack Bitcoin’s security, effectively undermining one of its core value propositions. However, with today’s ASICs currently maintaining a 10-year speed advantage over quantum computers, it may be a while yet before we see quantum computing take over.

Ultimately, whether it’s through the next groundbreaking chip innovation or an entirely new technology, the mining industry still has some years to go as it awaits the next revolution in bitcoin mining. But one thing is for sure — the growing demand for bitcoin mining will serve to fuel further technological innovations, as the mining sector looks onwards and upwards.

About Canaan: 

Canaan is a leading provider of supercomputing solutions, distinguished for superior cost-efficiencies and performance. In addressing the limitations of today’s computing hardware, Canaan strives to advance the world we live in by powering transformative technologies.

Canaan is renowned for having invented the world’s first ASIC-powered bitcoin mining machine in 2013, radically catalysing the growth of a computationally-advanced bitcoin mining sector. Today, Canaan continues to be the second largest designer and manufacturer of bitcoin mining machines globally.

Developed through academic research, rigorous expertise in semiconductor design, and backed by a robust network of strategic partners, Canaan continues to expand its suite of advanced hardware offerings, exploring opportunities across some of the world’s most exciting emerging technologies.

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About Nangeng Zhang:

Nangeng “NG” Zhang is the founder, chairman, and CEO of Canaan Inc., a leading provider of supercomputing solutions. While specialising in the field of supercomputing, NG explored the potential of application-specific integrated circuit (ASIC) design, consequently launching the world’s first digital cryptocurrency miner based on ASIC chips, and catalysing the era of ASIC mining.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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