

Bitcoin – The Magic of Mining - mgertner
http://www.economist.com/news/business/21638124-minting-digital-currency-has-become-big-ruthlessly-competitive-business-magic

======
danbruc
Mining is what will ultimately make Bitcoin fail. You want to give everyone a
single vote so that the majority can agree on which transactions are valid and
which are not. But because you don't want a central authority that checks ID
documents you come up with the idea of mining - make having a vote in the
Bitcoin network an expensive thing by requiring to buy hardware and then spend
more money on electricity to keep you hardware alive. It's not really fair
because if you happen to have a lot of money you can buy a lot of votes.

But the really bad thing is that you just made Bitcoin transactions pretty
expensive - I got six Dollars per transaction for electricity only about a
month ago. Even worse, processing more transaction will or should not lower
these costs. If Bitcoin would really take off processing transactions worth
billions every day, you really don't want to protect them by hardware and
electricity costs only worth a few millions because the growing transaction
volume will also increase the amount of money someone would be willing to
spend to mess with your system. At least up to some limit you really want the
total mining costs proportional to the transaction volume.

And from there down it goes. Bitcoin transactions are not cheap even if the
current low transaction fees suggest it. As the block reward goes down all the
costs of running the Bitcoin network will end up as transaction fees. And
transaction costs of several dollars are the death of micropayments and
Bitcoin adoption in the underdeveloped world, two of the most lauded arguments
for Bitcoin. I am not dismissive of the idea of cryptocurrencies but Bitcoin
with its proof of work scheme won't be the queen of the prom.

~~~
mrb
Your math is wrong, making your entire premise/argument invalid. A transaction
costs $0.60 of electricity as of right now:

150000 kilowatt (power consumption of the global Bitcoin network [1]) ÷ (3600
(sec/hour) * 7 (transaction/sec)) = 6.0 kWh/transaction

The worldwide average price of 1 kWh is $0.10, so a transaction costs $0.60 in
electricity to be processed by the network.

Also, the 7 transaction/second limit comes from the current 1MB block size
limit which was chosen by agreement. It will be increased in the near future.
If it is raised to, say, 10MB this would allow 70 transaction/sec, hence
reducing the electricity cost of a transaction down to $0.06.

[1]
[http://www.eetimes.com/document.asp?doc_id=1323522](http://www.eetimes.com/document.asp?doc_id=1323522)
\- the global hashrate has increased by 50% since this article was written
(~200 petahash/sec in August 2014, up to ~300 petahash/sec today) but at the
same time hardware efficiency (hash/sec per watt) has increased, so the
ballpark number is correct

~~~
sharpneli
Where do you get 150 000 kW? Even assuming all the miners are the best I could
find (Achilles lab series) [1] that comes to 190000kW based on current
hashrate [2].

Your transactions/second is also bit off. Right now based on blockchain.info
the highest transaction day had 115787 transactions [3]. And that day the
backlog of unconfirmed transactions got as high as almost 6000 unconfirmed
transactions [4]. It doesn't matter at all if the network can "theoretically"
support 7tps if it chokes at 1.3tps

That brings the actual kWh cost into 40kWh/transaction and up to the same
ballback as what GP had.

Based on the arguments on forums right now it looks that increasing the block
size is impossible. Because that would hard fork the blockchain.

When new coins are no longer being awarded to miners then people will have to
start to pay the transaction fees themselves. Right now the mining is
subsidized by what basically amounts to printing money and thus effectively is
a small inflationary tax to everyone using bitcoin.

[1]
[https://en.bitcoin.it/wiki/Mining_hardware_comparison](https://en.bitcoin.it/wiki/Mining_hardware_comparison)

[2] [https://blockchain.info/charts/hash-
rate](https://blockchain.info/charts/hash-rate)

[3]
[https://blockchain.info/charts/n-transactions](https://blockchain.info/charts/n-transactions)

[4] [https://imgur.com/GAklIdZ](https://imgur.com/GAklIdZ) The most delicious
moment was not screencapped, but this is quite close. Even as this was
happening the miners happily issued small blocks (500kB and less).

~~~
vanzard
The network never "choked" at 1.3tps. There are peaks of activity near the
theoretical max of 7 tps (check for blocks close to 1MB in size). There are
thousands of unconfirmed transactions because their senders chose to include
fees that are too low (or no fee at all), so miners decide to not process
them.

> When new coins are no longer being awarded to miners then people will have
> to start to pay the transaction fees themselves

That's not how it works. People (senders) already pay the transaction fees
themselves.

~~~
sharpneli
7tps is achievable only when every transaction has a single input and a single
output. Real transactions are not like that, not by far.

People do not include enough transaction fee. I just clicked open a block with
most transactions on the recent list on blockchain frontpage
[https://blockchain.info/block/000000000000000017f4d893e29b1e...](https://blockchain.info/block/000000000000000017f4d893e29b1e5b0ba5d65d0416aed997afbf836c63f17c)

+.1715506 worth of transaction fees. That's by far not enough to support a
decent mining rate. In order to support current mining rate a single block
must have roughly 25BTC wort of transactions fees.

------
Animats
That's a good article on Bitcoin mining.

Last week a big cloud mining operation, CEX.io, shut down.
([http://www.coindesk.com/cex-io-halts-cloud-mining-service-
du...](http://www.coindesk.com/cex-io-halts-cloud-mining-service-due-low-
bitcoin-price/)) The price of Bitcoin has dropped to the point that their
operation was unprofitable.

Because the total weekly reward to all miners is fixed, all miners are in
direct competition. If mining effort doubles, return on mining investment
halves. The big operations are starting to hit that limit. The little guys hit
it a long time ago.

------
brainy
guys here in africa ze are starting to accpt bitcoin and i think this will
have a positive effect on the coin [http://techunzipped.com/bitcoin-
conference-africa/](http://techunzipped.com/bitcoin-conference-africa/)

------
thefreeman
[https://www.google.com/search?q=Bitcoin+%E2%80%93+The+Magic+...](https://www.google.com/search?q=Bitcoin+%E2%80%93+The+Magic+of+Mining&oq=Bitcoin+%E2%80%93+The+Magic+of+Mining&aqs=chrome..69i57j69i64.239j0j7&sourceid=chrome&es_sm=122&ie=UTF-8)

~~~
drivingmenuts
Thank you.

------
mrb
_" last year it performed even worse than the Russian rouble and Ukrainian
hryvnia"_

A number of journalists have relayed this claim lately, but I find it
disingenuous as it avoid talking about the real reason (volatility) and it
hides the big picture (Bitcoin is up 3200% over the last two years [1]).

Otherwise, this is a good article about mining. But one comment I would like
to make is that people, like this author, sometimes claim Bitcoin's mining
consume a lot of electricity. But compared to what? It is fair to compare it
to the many data centers owned and operated by credit card processors, banks,
and all sorts of financial companies, but only to the portion of these data
centers that fulfill a role roughly comparable to Bitcoin: processing
transactions, verifying fraud, etc. Let's do some math: North American data
center market power consumption is about 12 gigawatt [2]. I don't know what
the world data center power consumption is, but let's assume ~3x that, or 30
gigawatt [3]. Let's assume that 1/3 of these data centers belong to financial
companies, so 10 gigawatt are consumed by financial data centers. If half of
these data centers are used to process transactions and for anti-fraud
purposes, that's 5 gigawatt. By comparison, Bitcoin's mining operations
worldwide are estimated to consume 150 megawatt [4]. So Bitcoin mining uses 3%
of the electricity of what financial companies use for similar purposes.

[1] From $6 in January 2013 to $200 as of today:
[http://bitcoincharts.com/charts/bitstampUSD#rg730ztgSzm1g10z...](http://bitcoincharts.com/charts/bitstampUSD#rg730ztgSzm1g10zm2g25zl)

[2]
[http://www.datacenterdynamics.com/focus/archive/2014/01/15-g...](http://www.datacenterdynamics.com/focus/archive/2014/01/15-growth-
forecast-north-america-colocation-market-2014-0)

[3] 30 gigawatt is also approximately in line with the often quoted estimate
that data centers use ~1% of the world's electricity (~1% of 2500 gigawatt).

[4]
[http://www.eetimes.com/document.asp?doc_id=1323522](http://www.eetimes.com/document.asp?doc_id=1323522)
\- the global hashrate has increased by 50% since this article was written
(~200 petahash/sec in August 2014, to ~300 petahash/sec today) but at the same
time hardware efficiency (hash/sec per watt) has increased, so the ballpark
number is correct. In fact the economist article also estimates it at ~135,000
average american homes, or 168 megawatt (1 average home = 1250 watt).

Edit: @the_mitsuhiko: By definition, "volatility" is a price variation over
time, regardless if it is consistent or not.

~~~
bdcravens
In all these discussions of Bitcoin's price over N months, I don't see anyone
consider this: 2 years is 44% of its tradable life (first trades on Mt. Gox
were in July 2010). You might as well talk about Apple's performance since
2000, which is 44% of its tradable life. In which case, you see similar
returns (almost 3000%)

So if Bitcoin goes down to $30, that's an amazing investment, right? After
all, that's a 500% ROI!

~~~
cgjaro
Nobody talks about "percentage of tradable life" because this is a pointless
metric. You don't see banks publishing prospectus saying "this investment
gained x% over y% of its tradable life". %/year is what matters to all
investors.

> So if Bitcoin goes down to $30, that's an amazing investment, right? After
> all, that's a 500% ROI!

Absolutely. Buying at $6 in january 2013, and selling even at $30 would be a
500% ROI and a great investment over 2 years. What is your point?

~~~
bdcravens
"%/year is what matters to all investors"

Exactly. Only one in Bitcoin in January 2013 were those who were really deep
in the community. Investors don't care what the price was before they
purchased.

