Composition of crypto-assets mining value chain

Several stakeholders are involved in the processing of blockchain transactions. Ultimately, miners are responsible for the validation and adding of transactions to the ledger, usually involving a financial cost: electricity cost under PoW.

Source: Cambridge 2nd Global crypto-assets benchmark study


Hardware manufacturing

Under PoW, mining crypto-assets requires to solve a cryptographic, namely finding a hash fitting with a target pattern e.g. ending with 4 zeros. The probability to find a hash is proportional to the number of hash produced per unit of time, or hash power generally measured in giga hash per second (GH/s). Hash power is in turn related to the type of hardware used.


Historically, four types of hardware have been used for mining:

  • CPU (Central Processing Unit): It’s the type of device used to perform control logical and general-purpose functions in our computers, mobile phones, and most of electronic devices. They were used to mine Bitcoin at very early stage.

  • GPU (Graphical Processing Unit): Generally referred to as graphical card, they are tailored to handle display functions. They took over CPUs in late 2010 because of their superior processing speed and energy efficiency.

  • FPGA (Field Programmable Gate Array): The performance of these devices are superior to GPU. They gained traction for Bitcoin mining in mid-2011.

  • ASIC (Application-Specific Integrated Circuit): They are customized hardware chips optimized for a single task. They have been a preferred mining device from 2012.

68% of mining equipment manufacturers reportedly focus on ASIC while 32% focus on FPGA. Optimization have led manufactures to even design mining devices circuits for specific mining algorithms e.g. Ethash, SHA-256, Equihash.


Mining facilities

In theory, anyone can enter the mining industry by downloading and running a mining software on an equipment. This is called proprietary mining. In practice since the difficulty of valuable PoW blockchains like Bitcoin have risen, hashing would require many specialized equipments to be economically viable. This reality has led hashers to build mining facilities providing services:

  • Remote hosting: operating and maintaining customer-owned hardware

  • Cloud mining: renting hashpower on demand

It is important to understand the environmental impact of mining. The energy-intensive nature of PoW spread lots of debates since researches conducted based on different set of parameters yield divergent results. However, a range of energy consumption of the top 6 crypto-assets working under PoW is estimated to 52 TWh to 111 TWh per year, with Bitcoin accounting for 75% of that.


As a comparison, the middle point of this estimate correspond to the energy consumption of Belgium in 2016, which also represents less than 0.01% of the World’s annual energy production, or is equivalent to electricity generated by biomass and solar energy in Germany.


Provided mining facilities would continuously seek low cost energy typically targeting renewable hydroelectricity, the environmental footprint of mining shall not be generalized as it primarily depend on the energy mix. As a matter of facts, 56% to 60% renewable energy are reportedly making up the energy mix of mining farms.


Pool operators

Mining facilities ultimately points towards mining pools to smooth earnings. The function of a pool is to put together computational resources provided by hashers, who are pool contributors. The rational behind this is to increase the frequency of successful hashing, thus smoothing payments for all contributors.


Membership is generally not restricted to certain jurisdiction, the main requirement is to have a fast and stable internet access. Ethereum has the largest number of 87 identified pools, followed by Bitcoin’s 57 pools, and Zcash’s 45 pools.


It is important to mention the contrast of this economic reality leading to concentration of mining power, and the fundamental blockchain principle of decentralization. In the case of Bitcoin’s blockchain for instance, 4 mining pools are reportedly owning more than 50% of the network’s hash power.


For more information, please refer to the following report: https://cdn.crowdfundinsider.com/wp-content/uploads/2018/12/2018-ccaf-2nd-global-cryptoasset-benchmarking-study.pdf


Check the full version of Blockchain Quarterly (Q1 2019) report for more Insights.

© 2020 bqintel.com

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