“Mining 2”: the capital is not only cut chives

This article from the block chain headquarters (ID:blockchain_camp), the author: Cambrial Capital translation: Wang Guoxi, Bob, the daily planet authorized forwarding.

BCH war, bitcoin prices plummeted, the average value of 200 weeks has been approaching the psychological barrier. Affected by this, a good day is over the miners to the head, micro-blog on a machine by catty sale “video even boarded the hot search, a panic in the market.

But on the other side of the Pacific, the United States miners also bursts of screams. According surging news reports, once the monomer Giga Watt has been the world’s largest mines in 18, filed for bankruptcy protection, a residual 5 million dollar debt problems, but up to 1000-5000 million dollars.

Was originally used to maintain the stability of the block chain network miners, under the currency price fluctuations have no ability to resist. If a block chain network even stability of their services are not guaranteed, how can expect tens of thousands of ordinary people rely on it?

A brief review of the construction of the global Internet cable, we can find that the first infrastructure well, flourishing Internet economy to develop.

In 1990, for the submarine cable only in continental Europe connected with surrounding islands only 4; but today, the number of global submarine cable has exceeded 400, the number of routing nodes has more than 520 thousand. It is composed of the neural network in driving the global Internet economy to create a new economic miracle, especially the submarine cable most after the Internet bubble burst in 2001 new.

In contrast, want to become the “first global currency bitcoin, the number of nodes is always floating. Although the bitcoin network currently has 9298 nodes, but this wave of closures under the surviving miners can have many, we can make nothing of it.

In the end of the cut chives inexhaustible, really have ruined the technology chain block.

In particular, the bitcoin network is currently the most stable block chain network. At the start of year Nakamoto bitcoin, no sale any bitcoin, no VC have the privilege to participate any person can can deploy the bitcoin node itself, by mining to get bitcoins. So the price volatility does not appear, those people quitting the pre investment; but bitcoin fell really will let those faithful maintenance node miners in a situation to make ends meet, even bankruptcy.

According to Metcalf’s law, the miners bankruptcy led to scale to reduce network users, the network users to the value will decrease exponentially, this may lead to a further decline in the price of currency, and form a vicious spiral.

To solve this problem, a concept of “mining” generalization of the trend gradually surfaced. The generalization of mining (Generalized Mining) “was first used by CoinFund for the part of the investors of the request, is the main constraint they cannot disregard the project anyway, just throw money and harvest. They must actively participate in the construction of block chain project: mining or validate transactions or operations or node, or to resolve disputes…… Only everyone’s contribution value, maximize the value of the network can.

Then, the concept of “generalization mining” further expansion in the practice of block chain project in Livepeer, and gradually formed a “2 character” concept.

Recently, Cambrial Capital will sort out the concepts of logic, as a special topic published in “economic card through Medium (Token Economy)” column, block chain headquarters reorganization are as follows:

With the multi market like Augur, Filecoin, Livepeer, Orchid, Kleros these more complex “(n-sided-marketplace)” rise block chain network, “the third party economy (third party economies)” gradually into our line of sight, and brought a lot of very attractive opportunities for speculation.

However, in the face of this new thing, we are still feeling the stones, it is unclear how to develop as investors to participate in them correctly. In order to analyze the opportunities, we can start from the analysis of the traditional means of fund investment strategy, step by step analysis.

The miners and the verifier block chain is the task of network protocol according to the network consensus, spend some resources (or freeze some rights as collateral) to participate in the competition in the election or block generation. The successful generation of a block, they will get the block of transaction fees, such as the network block reward passes form of monetary incentives affect mining can also be used to combat inflation of course. These costs can be seen as a necessary cost of security block chain network security.

Other participants block chain network, such as Livepeer transcoder (transcoders) and Filecoin in the miners, their task is to provide network services required to earn fees, unlike other networks, these costs are usually and there is not the network card in the form of these network services the expense is usually to some other network card (such as some stable currency denominated), “workload (Work token) passes” block chain network types belong to this category.

Finally, the block chain network to third parties often provide some opportunities for profit, and sometimes it is intentional, such as payment channels in the Maker network, the guardian lightning in the network, but sometimes not (for example in the Steem network (front-running bots) in front of the robot). CoinFund will these profit opportunities is referred to as the “third party economy”, this is a very general term, because it contains a package of content, for example, there are some direct arbitrage, and some provide liquidity (liquidity provision), the bond market making activities (market making), front (pre transaction running), “guard” (such as Polkadot network fishing (fisherman)), or just some people will buy the user interface or programmable interface layer.

Mining and verification

Generally speaking, in the mining and verification services, the final winner will be the infrastructure companies and large trustee.

Because the underlying services need to be stable and efficient. The underlying mining and verification of the miners can be collected rent telecom operators, from the block chain economic application layer stripped out, accept the “net neutrality” or similar principles of constraints, and ultimately should provide users with stable and efficient service block chain network as the basic goal.

According to the proof of work (PoW) behind the economic phenomenon of mining, we believe that in the future everyone will buy the same mining chip from 1-3 mainstream manufacturers there were mining, using the chip and the power consumption per hour cost competition.

At first glance, you might think I’m talking nonsense, then I will explain.

“Everyone will buy the same mining chip”

Chip production is a high cost, high fixed cost business. The reasons from many aspects, from the technical level, extremely difficult chip design, from the commercial point of view, behind the chip production, promotion and distribution requires a lot of financial support, so that some people will be called “chip business burn pit”.

We believe in this block of the ASIC block chain of value network (Application Specific Integrated Circuits, ASIC) is very difficult. In the proof of work in miners needs to do is to calculate the competition to perform specific types, usually do hash value calculation. If you can be faster than others, you have the right to produce block. Each calculation is clear and specific, which means that you can make the chip level customization, customization often means performance optimization. With the first generation of mining equipment: CPU CPU is a very versatile processor, it can be used to run the operating system, processing string, image processing and so on, compared with the second-generation GPU mining equipment with more specific constraints, in most cases it is slower than CPU, but in the vector operation GPU faster therefore, be used to do image processing. ASIC mining and dominate the dig through a single constraint to achieve logical reasoning, for example “can be designed specifically for the SHA256 calculation of bitcoin mining of the ASIC, you don’t even need to take this into the programmable chip design, you can directly write to the chip algorithm.

So, as long as the block chain network or proof of work model calculation of a specific type, these manufacturers will be driven by economic interests continue to optimize the chip count, the chip production is both difficult and expensive, so the chip production center will gradually, the market should leave only 1-3 manufacturers, so that people will buy the same chip.

“To take advantage of the chip and the power consumption per hour cost competition”

When the chips are the same, the influence factors of the profit equation is only the power consumption cost, it is not difficult to imagine, the location of bitcoin super mines are selected in the price low places, such as Sichuan and Inner Mongolia, but this is not the best, the most ideal situation is “less than zero power consumption cost that is to say,” do you use electricity, power supply bureau will give you enough money, this is not Arabian Nights. Because some types of electric power production basically is not regulated, such as nuclear power and fixed solar photovoltaic power generation. In most cases, the power supply bureau will use nuclear power as the main power output, and then use the adjustable thermal power station to meet the power demand of the remaining. However, sometimes the power supply bureau will mistakenly predict the future electricity demand, electricity supply may produce excess power, and unlike other resources can be discarded in this case, the power supply bureau must dispose of it, and hundreds of gigawatts of power supply bureau is very difficult, can only choose to spend processing. Therefore, some parts of the world just run ASIC machine can get compensation.

So, in our opinion, the proof of work is a universal game mining infrastructure, the winner is more likely to be the infrastructure company. Mining is a traditional industry with high fixed cost, and has little relation with high-tech enterprises.

Next we talk about the proof of interest and its variants.

In the proof of interest and principal rights proof (delegated PoS, dPoS), the miners need to freeze some passes as margin for the block vote, if the entire network to reach a consensus on this block, the miners will be rewarded, if the entire network has different discussion on this block, the miners will be affected by some economic penalties (inflation etc.). From the perspective of economics, the rights that looks a bit like a fixed income products, mining is like in the purchase may suffer huge accidental loss of financial products, but often there is no risk.

The same proof and workload, proof of interest is a very beautiful game: either you bet, or not. All cards are equal in terms of profitability, you can not be small, in other words, no gross profit leverage network (gross margin leverage). In a sense, the network has some operating leverage, because the interests of proof of the need for basic infrastructure (i.e. high fixed costs), but not many. The real use of leverage is the principal rights certificate. The proof of interest is a zero marginal cost of business (rather than the need of automobile production assembly and assembly cost to produce some marginal business units), the entrusted management rights of large ore pool will obtain excess returns.

From the perspective of the rights and interests of the client, client rights looks like cash in a bank account, people do not put their life savings to banks that knowing is not reliable, you can store them in one of their own understanding and trust bank (based on cognitive load theory (cognitive load theory), usually no more than two). People usually want to be entrusted to their own interests who will eventually become the industrial and Commercial Bank of China in the world of encryption pool, we are not sure what the pool will eventually win the favor of people, but we think the brand effect is very important here. Who won the trust of the masses of the pool will win in the competition, and deposit the same, this is not a particularly high profit business (because it does not involve the monopoly, competition will be very fierce, but the winner of this business).

Basic service

The opening of the service is widely used in block chain network terminology. In this paper, we refer to the opening of the service is the basis of providing service to the user terminal through the block chain network, they include:

Transcoder to terminal users in Livepeer to watch live content in the network, through the network to provide transcoder computing power and bandwidth to provide service to the user terminal.

The miners to terminal users in Filecoin to store files, miners to provide storage space for the network, and regularly submit data to get the correct proof storage.

To the center of the relay of the anonymous proxy network Orchid (Relayers) – terminal users want to browse the Internet anonymously, routing nodes as relay the Internet content, to ensure that the end user can hide the identity.

Fundamentally speaking, most of the block chain network is multi market, the number of participants is greater than 2, the above mentioned block chain network also confirmed this view, even bitcoin can also be viewed as a market: users want a safe ledger originally transfer of funds, the miners to provide the service to the transaction fee block and reward.

The most common situation is a group of people need some kind of service, while another can provide this service to the. Block chain protocol as a platform to help them establish contact and enforce the rules, like a taxi drops, help passengers and owners.

With the rapid development of block chain network, the platform can provide services has become diverse, can be said to have spawned encryption in the world (consisting of gig economy, economic work refers to the workload is not much freedom of occupation economic field).

Kleros to the center of the arbitration platform, in this platform, the two sides dispute can be submitted to the network by the network to the center, randomly selected (also sometimes designated) arbiter to review and Adjudication of disputes. The successful settlement of disputes will be paid by both arbitrator arbitration fees, this is a legitimate business opportunity, but a short period of time it is very difficult to accept, for example, when you see a hedge fund company hired a large number of lawyers and let them in on the platform of Kleros is also will feel awkward disputes arbitration.

“Third-party economic”

As the name implies, block chain ecological health led to the prosperity of economic activity around. We believe that the new economic system in the trading and risk investment are investment opportunities.

For instanceļ¼š

  • As the Maker network in the guardian, the mortgage debt positions (Collateralised Debt Position, CDP) arbitrage.

  • Tracking in Steem network and pre – transaction trend predict what will become hot, and behind the bet.

  • The market in the Augur network (and arbitrage in the market between).

In all these examples, you are in:

  • Direct interaction with the blockchain protocol

  • Freeze a certain margin

  • In order to carry out the transaction

  • In order to obtain profits

From this point of view, these investment activities with Renaissance Technologies, Two Sigma, Jane Street and other quantitative investment fund investment is not much difference, the only difference is the investment in different locations, a block chain network and the other is the New York stock exchange, and investment strategy is basically the same market (e.g., arbitrage, short-term price forecasting, high-frequency trading etc.)

From the block chain network perspective, these investment activities are usually popular, even in most cases for the normal operation of the network is essential. For example, the guardian is an integral part of the Maker network: the network positive arbitrage guardian will help ensure passes DAI got the right mortgage, at the same time as the market maker ruler increasing liquidity, in order to enable more people to participate, the Maker team developed and open source library to simplify the processes involved in this. Means that they actively encourage the guardian of the existing network.

In fact, if you go to the center of Finance (Decentralised Finance DeFi) vision to become a reality, we will need a large number of such participants to make these markets more efficient. Our team members of Edward to the center of the financial depth research, specifically block chain network in the interest rate, income difference (spreads) and the yield curve (yield curves), we need participants and more liquidity to improve these indexes, so as to make the market more efficient.

The capital is not only cut chives

In our team has been a controversial issue, is whether the capital can be achieved through active support and cultivate value chain network to block growth? As far as we know, the profit of early investors are usually given the material support in the block chain network “from scratch” stage.

However, the capital side really suitable to play the role that the operator in the block chain network? The construction of these network security network security hardware cost and engineers who will pay the cost? The capital side should provide advice and help to establish a connection, or should play a role of the growth of outsourcing consulting firm?

The best answer is probably, the capital side to block the chain network to provide start-up capital, and give financial support in the generalized network of miners, such support means almost does not require any hardware spending. For the capital side, the main goal is to participate in the project a few months after the release of the main chain block and support. Especially for the block chain network such as Livepeer and Orchid, in these networks, due to their delay, node number, number, number of repeaters transcoder is not enough to support the normal operation of the entire network, at this stage to the network is obviously valuable timely assistance.

In addition, from the early start to support these block chain network may also be a profitable activity. A new block chain network with the existing block chain network competition is not only the user, it is behind the financial support. The existing block chain network in the miners often have configured the software, mining strategy, security strategy, if there is no attractive incentives, how can they have migrated to the library, no ecosystem, no new block chain network mobility? Investment project risk investment fund chain blocks naturally in understanding (and influence) with information advantage passes and how best to support the dynamic block chain network, which far exceeded the industry returns in early block chain network competition is not fierce can.

How to solve the founder of the deadly pain points do not intervene in the premise of company management? This is a problem of the industry’s top capital will think deeply. For example, the Figment team has split the business Figment capital (Figment Capital) and Figment network (Figment Networks) operation of the company, the Figment network is the core of Figment capital holding enterprises. Although the tax efficiency is relatively low, but it is helpful to solve the potential tax “safe harbor” problem. Figment believes that actively participate in the project will help them to better understand the project, and from the capital side to better guide the project decision.

Finally, Cambrial Capital wrote, as more investors like to participate in the NYSE generally involved in the block chain project, they will give the block chain network with high efficiency and influence of traditional investment, help block chain shift from capital as experimental basis for true global public facilities.

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