Modeling Blockchain Miners

Miners are critical infrastructure for blockchain networks. I am going to model a minimum viable miner to understand this process better. For this exercise, I will be using a proof of work chain (like bitcoin) for simplicity.

Inputs :

  • Software that implements the mining algorithm
  • Hardware to run the software on
  • Electricity to power the hardware.
  • Other — place to put the hardware, people to oversee the process, etc

Outputs :

  • The token, in this case, bitcoin.
  • Heat as a byproduct, and
  • Expertise in running these types of systems

Goal : Generate and Maximize profits

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The business of running a miner

Expenses :

  • Initial Capital expenses
  • Recurring
  • Electricity
  • Rent
  • Salaries
  • Compliance

The majority of expenses are in fiat, generally stable.

Revenue Sources: Sell or rent each of the following

  • Token
  • Heat — geographically restricted or not possible
  • Expertise — is situation dependant and may generate competition

A miner can choose how much of the output they need to convert to revenue.

Optimizing Profits

  • Decreasing Costs — Find cheaper or free sources of electricity, access mining hardware for cheaper, Find places with lower rent( but have access to cheap electricity)
  • Increasing Revenue — Find better hardware to produce more tokens per hour
  • Mine other tokens that have a higher price or lower cost of production

Smoothing the Revenue Curve

  • Capital Management — If a miner has a reserve of tokens, then they can hire someone to manage that reserve to generate other revenue.
  • Create relationships with OTC dealers, Exchanges, Funds or any buyers of decent size, who can have more stable buying patterns
  • Financialize things like hashing power, participate in futures markets etc.

External Forces

  • Block Subsidy — All else being equal, miners would like the price of the mined token to be higher. If block reward goes to zero, miners are incentivized for higher fees per block.
  • Electricity prices — All else being equal, miners are incentivized to find the least expensive electricity.
  • Competition — Because the probability of mining the next reward is (somewhat) proportional to the miners share of total hashpower. Miners are incentivized to grow their capacity.

How miners can play offense

  • Given the change in reward is public, miners can change their holding patterns to take advantage of this situation.
  • Invest in more powerful or more efficient hardware ASICs for example.
  • Find monopoly access to electricity
  • Mine empty blocks
  • Invest in creating better mining software
  • Lobby local regulators for favorable treatment
  • Invest in longer-term research like Photonics

Playing with the variables

  • Mining Pools — Spread out cost of electricity, hardware costs but introduces a revenue share
  • Optimizers — Given total capacity remains the same, miners can move to other networks for more profits. Especially if this is done programmatically.
  • Mining as a service — When you have the expertise but not the capital to start mining at scale. There are principal-agent problems.
  • Personal miners — Currently, there are large mining pools that dominate mining. Given the process is public, anyone can set up a miner.This can be profitable on networks with little competition or where the goal is not strictly financial.

There is still a lot of ground to be covered here, like Modelling miners for non-Proof-of-Work networks, Generalized Mining, Participation in Forks, and Implementing updates. However, this model can act as a base that can be expanded as needed.

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