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
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.