Last week, Bitcoin finally surpassed its all-time high, topping $ 23,000 for the first time. Since the beginning of the year, profits of over 180 percent have been achieved.
This was largely due to the growing institutional interest. Established names like Square, Galaxy Digital, and Grayscale Investments helped take bitcoin scarcity to a new level. Well-known market index providers have now made promising announcements. S&P Dow Jones Indices announces the launch of crypto indices in the coming year, signaling greater interest in the world of traditional financial markets. This recognition – in the form of financial legitimacy as well as commercial promises – is extremely valuable in pointing the way to Bitcoin’s long-term future.
However, if we pull back the curtain and take a behind-the-scenes look at the mechanics that have anchored Bitcoin over the years, success rests on an ever-growing ecosystem of miners and their trusted hardware. Over the years, Bitcoin mining has quickly cemented its position as a lucrative industry. In 2019 alone, the global mining industry had sales of $ 5.4 billion. In an environment where success is determined by a balance of cost, performance, and efficiency, mining hardware companies have certainly felt the impact of the “innovation crisis” as they seek infrastructures that will meet the computing needs of the future.
When we look back on 2009, when the first peak of innovation occurred, let’s take a look at what has changed and where the industry is headed towards the end of the year.
For the specificity
When Satoshi Nakamoto mined Bitcoin’s Genesis block in 2009, mining arguably was a more accessible task. Far from the computationally intensive image bitcoin is associated with today, the earliest days of mining only required the use of a computer’s central processing unit (CPU).
That changed in October 2010 when 1 bitcoin was worth an incredible $ 0.10 and the very first mining hardware with graphics processors (GPUs) was developed. GPU devices are characterized by their comparative specificity. GPUs are often optimized in connection with the game industry in order to calculate individual mathematical operations in parallel. This leads to a six-fold increase in efficiency compared to CPUs.
Despite their speed, GPUs were later overshadowed by field programmable gate arrays (FPGAs). Although development is far more labor intensive due to its specificity at the software and hardware level and requires the ability to execute custom code, this specificity has led to success in applying FGPAs to Bitcoin mining.
In 2013 the innovation became clear again with the invention of the world’s first application-specific miner based on integrated circuits (ASIC). After years of research and development, the industry now had its first form of specialized hardware specifically designed for bitcoin mining. No longer limited to general-purpose software and infrastructure, these ASIC-based miners offered unprecedented benefits in terms of performance and efficiency.
As competition intensified to gain a significant portion of the network, profit-sharing programs emerged. Individuals gathered to form mining pools, shared the costs and resources of running miners, but also reaped block rewards as a collective team. On the flip side, larger players began entering the bitcoin mining space as full-fledged mining operations, catalyzing additional considerations such as access to capital, location, and regulation for today’s generation of miners.
In an environment dominated by several players, mining hardware companies have been competing for chip size and thus efficiency for years. As the size of the chips shrinks, mining rigs can process increasing hash rates in line with the growth of the Bitcoin network, without compromising on cost and energy efficiency.
The age of the ASICs
Amid the 2019 bear market and the earlier pandemic-sparked battles of the year, past cases have shown the mining sector to be resilient in turbulent times – and this cannot be overstated.
However, since 2013 developments in mining technology have continued to be based exclusively on ASIC hardware. Miners could soon choose to compete on conditions other than hardware, be it on energy efficiency and sustainability or geographic dominance. Smaller chip sizes certainly represent significant technological milestones on a grand scale, but is that enough in terms of competitive advantage?
For one, mining profitability has risen in recent months amid the steady recovery in Bitcoin prices. Miners still have incentives to continue investing in ASIC-based mining hardware at a profit – whether it is new models or even older variants on the used market that can be reused and used for other purposes. Last November alone, miners’ daily earnings returned to pre-halving levels, reaching highs of $ 21.7 million in a single day.
While there are other mining machines in the market that are tailored for specific altcoins, ASIC-based miners continue to dominate. With projected optimism for Bitcoin in the New Year, the future of the mining sector is assured. ASIC mining machines reflect the credibility of the Proof of Work (PoW) as the proven consensus model of the past decade and are still best positioned to meet this ever-increasing need for computing power.
A quantum problem
However, in the ups and downs of innovation, it often takes something completely new – as we learned from ASICs – to move further. Beyond chips, Bitcoin mining players are watching the emerging fields in supercomputing. These technologies have the potential to question existing hardware in terms of speed, but also in terms of security. This poses a threat to the cryptography that Bitcoin and most of the crypto assets are based on today.
In the case of Bitcoin, the security of asymmetric cryptography is as essential to its overall security functions as it is to one of its core value propositions. As early as 1994, the publication of Shor’s quantum algorithm posed an existential threat to all systems that use asymmetric encryption, as this can break the system’s security assumptions. With a quantum computer, Shor’s algorithm could be used to extract a private key from the corresponding public key, thereby forging a digital signature and compromising the integrity of a system.
Research by Deloitte has shown that 25 percent of all Bitcoin in circulation is potentially susceptible to a quantum algorithm attack – provided that quantum computers can meet the current transaction throughput of the Bitcoin network of around 10 minutes. Fortunately, today’s ASICs currently have a speed advantage of 10 years over quantum computers. Should quantum computers play a role in writing the next phase of crypto mining, there should be benefits in reducing operating costs over the long term.
As the Bitcoin mining sector ponders its future, threats are undoubtedly in sight: from the growing appeal of less computationally intensive consensus models like Proof of Stake (PoS) to sophisticated cases of crypto jacking where one’s computing power is illegally procured becomes the purposes of mining cryptocurrencies, which is rapidly gaining popularity when compared to traditional ransomware schemes. Although the risks abound, the past few years have shown that a strict commitment to research and development across the board has matured the technology and ushered in a new wave of institutional and commercial interest – and this growing demand will catalyze a new phase of growth in bitcoin mining.
When we know something for sure, it’s far from the end of the street.
This is a guest post by Nangeng Zhang. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.