The Future of Bitcoin Mining

What you need to know about bitcoin mining now and in the future.

Bitcoin The Currency & The Protocol

Bitcoin the currency• Used for trade.

• Merchants accept it and spend it.• Individuals accept it & spend it.• Can be transferred instantly around the world.

• Is stored in a “wallet.”• Is defined by its private & public keys.• Referred to as “BTC.”

Bitcoin the protocol• Not used for trade.

• Can not be sent or received.• Can not be transferred.

• Defines what a wallet is.• Defines what private & public keys are.• Defines how private & public keys are used.• Defines how nodes (peers) communicate with

each other.• Never called “BTC.”

Deflationary & Inflationary Currencies

• Inflationary Currency• Print as much money as you want (USD, Euro, GBP, etc...).

• Deflationary Currency• A limited amount money is printed and no more afterwards (bitcoin).

Divisibility• Fiat currency (USD, Euro, GBP, etc…) can only be divided to a maximum of 100 units of the

base currency or 1/100 of the base, otherwise known as 1 penny.• Nothing can cost less than 1 penny unless you use another form of currency tracking

(Paper/Electronic ledger, barter, etc...)

• BTC can be divided to one hundred million (1/100,000,000) units of the base currency otherwise known as 1 satoshi.• Although it is unlikely anything will cost less than 1 satoshi, bitcoin can be modified

to support 16 (or more) decimal places or 1/10,000,000,000,000,000 (Ten-quadrillionth) of one BTC.

Central Authorities• Traditional ledgers have a central authority.

• Local merchants, banks, the government, etc...• Someone other than you controls the existence and flow of your funds.• As ledgers grow and central systems become larger, altering, forging or

counterfeiting and fraud become easier to do and harder to keep track of.

• Bitcoin is Peer to Peer (P2P)& a minimum of 51% of the network must agree on the ledger.• It is controlled by everyone and by no one.• You control your funds.• Unlike traditional ledgers, as the bitcoin network grows and the ledger becomes

larger, it becomes harder to alter, forge or counterfeit the ledger.

Bitcoin is distributed, deflationary & divisible

• There is no central authority.

• Bitcoin can be divided to 100,000,000 million individual units per BTC.

• Addresses the problem of ledger control and divisibility that plague all fiat currencies.

• There will only ever be just under 21 million bitcoins produced.• There will be much less in actual circulation.• As much as 40% of existing BTC is no longer accessible.

Bitcoin is difficult for people to understand.

Mining even more so.

So, how does it work?

The Genesis block &

Fundamental components of the blockchain

The Genesis Block is the first block in the block chain and what all other blocks are indirectly built from

Bitcoin mining is reallyTransaction processing

also known as transaction clearing

Block # 201056

Block 201054

Block 201055

Blockchain

1. Transaction (Value: 2415)2. Transaction (Value: 5312)

3. Transaction (Value: 1351)

Block Value: 201056203471208783210134

Block 201056

The Blockchain

An unbroken chain of blocks, starting with the genesis block.

Changing, altering or forging the value of any one block in the chain invalidates any subsequent blocks.

This is due to using the value of the previous block on each following blocks

Transaction values51353

2

1

Value + Prev Block

17778

10960

2578

Block #

+Random Number

1683

Transaction values7614 +

Random Number768

Transaction valuesnone +

Random Number2578

Bitcoin MiningWhy would you do that?

Two Incentives-- Block Reward

• Halves every 4 years• Started at 50 BTC per block• Halved to 25 BTC per block in November 2012• Will halve again sometime around June 2016 to 12.5 BTC per block.

-- Transaction Fees

Bitcoin Transaction Processing

Mining Transaction FeesBlock reward will dwindle to very little reward in less than 20 years.Satoshi envisioned transaction fees to provide incentive to continue mining.

Fees are voluntary (and will always be voluntary)but

Does not mean they won't be "required" at some point due to transaction volume.This shift is starting now as transaction volume increases and space in blocks becomes more valuable.

Transaction limits• As block rewards dwindle, the incentive to mine is created through transaction fees.

• Currently, there is enough "space" in blocks to process all transactions, but in the future, there won't be enough "space" to process all transactions in the next block.

• Miners will favor transactions with higher fees over ones with lower fees.

• If there are enough transactions with higher fees than yours, your transaction may take hours, days or weeks to get processed.

• As transaction volume increases, this issue will become more prevalent. We are seeing the start of this process now.

Banks & Other Transaction Processors• Bitcoin is not the enemy.

• Bitcoin is another revenue stream.

• Bitcoin transaction processing (mining) is in line with current business processes.

• Bitcoin will always need transaction clearing (processing).

• Fighting bitcoin is a losing battle. Finding a way to integrate bitcoin into the current business ecosystem is a much more lucrative and simple evolution of current banking and transaction processing businesses.

• Maintaining a large mining farm is the quickest, easiest method to accomplish this.

Large Companies• You can guarantee your transaction being in the next block by including a high fee.

• This becomes costly if you are a high volume company.

• 1 penny per transaction, which is nothing compared to what Visa charges, would still cost $10,000 per day if you processed 1 million transactions per day.

• Maintaining a mining farm is a cost effective endeavor for large company who has lots of transactions.• It allows you to process your own & customer transactions for free & at a high priority.• Earns extra income through processing others transactions.

Medium CompaniesMaintaining a large mining farm is costly. What if you don't have enough transaction volume to warrant maintaining a mining farm?

• Hire out your feeless, priority mining to a mining consortium or company.

• Mining Companies maintain large mining farms and will process your feeless transactions for a monthly fee.This may prove cheaper than paying the transaction fees to get your transactions processed at priority.

• Mining companies may even have priority tiers, where $100 a month gets you ahead of everyone but those paying $200 and $300 per month.

• No one doing this yet, but there will be.

Small companies

• Paying transaction fees makes the most sense financially.

• Beats the cost of credit cards.

Security & Other Benefits

• Expect peering arrangements between large mining farms of similar size.• Provides hashrate multiplication & infrastructure without investment into additional hardware.• Provides backup transaction processing in case of catastrophe.

• Bitcoin is the ultimate expression of a democratic financial system.• Encourage pools to have a published, public list of philosophical and/or political agendas.

• Philanthropic / Non-Profit / Tax or Accounting benefits.• Ability to mine transactions you create before alerting the rest of the network.• You control your own money flow and supply.

Decentralization of MiningMining is not decentralized! It will be more decentralized as we become more industrial.

• Top 4 pools constitute the majority of the mining in bitcoin.• Top 12 pools account for 98% of the blocks created.• Industrial scale mining, large companies, large mining consortiums will increase decentralization.

• Nimbus Mining is an example of a large company decentralizing mining by giving individual miners a choice as to where to mine.• Cloud Hashing is an example of a large company decentralizing mining by “solo” mining (not using a public pool).

• Centralization in mining may be less than ideal, but it may be better than the alternative.• 2012 blockchain fork is a real life, real world example of how dangerous a truly distributed mining

network could be to bitcoin.

Mining for the future• Mining will be about transaction fees, both mining them for profit and mining to avoid paying them.

• It will also be about priority. Mining certain transactions at a higher priority than others will become very important for certain companies and individuals.

• Mining is far from dead, it is just shifting from being about direct profit to one about providing the service of mining.

• Anyone wanting to operating in the bitcoin space in any significant manner needs to consider mining and mine in some form.

• Mining is alive and well and will only grow in scope and power as the bitcoin network grows.