Modelling 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

Simple Miner Model

The business of running a miner

Expenses : 

  • Intial 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

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 programatically
  • 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 setup 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.

Understand the strategy, business and impact of blockchain projects.