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.
- 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
- 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
- Intial Capital expenses
The majority of expenses are in fiat, generally stable.
Revenue Sources : Sell or rent each of the following
- 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.
- 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.
- 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.
- 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
- 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.