The hashpower Darwinism

Leo Zhang

By Leo Zhang

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Editor's note

“We’re projecting no cryptomining going forward.”
-- Jen-Hsun Huang, CEO of Nvidia

On the most recent earnings release, the computing industry giant Nvidia reported much lower sales revenue from cryptocurrency miners than previously anticipated. The reasons are two folds:
1) consistently low trading price, and
2) monotonically increasing difficulty rate. The combination of the two trends is absolutely a nightmare for small-scale miners. Most GPU miners are opportunistic miners operating at close-to-cost. It is not surprising that the current mining cycle is squeezing out their profitability.

Nvidia's crypto gold rush goes bust in lackluster forecast
(Bloomberg, by Ian King)

"Nvidia said it had expected about $100 million in sales of chips bought by currency miners in the fiscal second quarter. Instead, the total was $18 million in the period, and that revenue is likely to disappear entirely going forward, the company said."

Why is this happening? Why does hashrate continues to climb while price shows no sign of recovery?

The fundamental drive is the rapidly specializing processing capability. Over the past decade, we can clearly see mining hardwares graduating from CPU to GPU, and then from GPU to ASICs.

The disconnect between the current directions of difficulty and price is because the hardware cycle moves at a different pace with capital markets. While the GPU miners start to take a backseat in the grand mining race, ASICs manufacturers are fiercely competing for market shares. In December of last year, the rapid bull ride created a plethora of new entrants to mining hardware space. New machines such from Bitmain, Innosilicon, Avalon etc are constantly releasing new products. The fierce competition shortens the life cycle for each machines and accelerates the increase of overall hashpower in the market. The main manufacturers are now eyeing massive IPOs to accumulate more firepower. If price continues to trend downward, and hashrate continues to explode, will the current trend persist? Morgan Stanley Semiconductor reseach defines the mining cycle with four phases:

MS-cycle

Given how quickly ASIC chips iterate, the competition between manufacturers is unlikely to slowdown until the demand from the mining operators start to significantly decrease. The fear of such scenario is part of the considerations these manufacturers are also looking into AI chips to help them get through the winter.

Such Darwinistic competition has repeated countless times in the history of hardware. For reference, read the thread below on the competition for calculator market dominance:

Story about the calculator competition in 1970s

This week's readings

Monday: A closer look at Bitmain's massive IPO
Tuesday: Slaying a dragon, one fork at a time
Thursday: Ethereum founder talks about the history and the state of Casper

Further readings this week

Zcash sets stage for 'Sapling' upgrade with new software release
(CoinDesk,by Nikhilesh De)

"The hard fork itself is expected to occur on October 28, when the first Sapling block will be mined at block 419,200. Prior to the live launch, Sapling will run on a test network (or testnet) from block 280,000 – an event Bowe said should occur sometime next Thursday."

Binance LCX launches fiat-to-crypto exchange in Liechtenstein
(CoinTelegraph, by Ana Alexandre)

"The new trading platform will be located in Liechtenstein and offer trading between Swiss Francs (CHF) and euros (EUR) against major digital currencies pairs, subsequently adding more trading pairs following regulatory approvals."

Yield curve crunch shadows Fed hiking even amid global agitation
(Bloomberg, by Alex Harris)

"Yet given the conference has historically offered only modest insight into the trajectory for monetary policy, Cloherty says he expects this week’s release of minutes from the Federal Open Market Committee’s Aug. 1 meeting to be more consequential for the bond market, especially if the topic of balance-sheet normalization was discussed."

A case study of currency crisis: the Russian default of 1998
(Abbigail J. Chiodo and Michael T. Owyang)

"By May 18, government bond yields had swelled to 47 percent. With inflation at about 10 percent, Russian banks would normally have taken the government paper at such high rates. Lack of confidence in the government’s ability to repay the bonds and restricted liquidity, however, did not permit this. As depositors and investors became increasingly cautious of risk, these commercial banks and firms had less cash to keep them afloat. The federal government’s initiative to collect more taxes in cash lowered banks’ and firms’ liquidity."