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What is mining?

                       A bird’s eye view of Bitcoin mining

                                   Meni Rosenfeld




1   Written by Meni Rosenfeld                                21/1/2013
Introduction
     Bitcoin mining consists in using computers to perform
       specific calculations, and obtaining bitcoins in return

     Bitcoin is not about mining!
         Bitcoin is a decentralized digital currency
         Mining is the means to that end
         A Bitcoin user does not need to do mining


     This talk will touch on key concepts in mining



2   Written by Meni Rosenfeld                                    21/1/2013
Why does Bitcoin need mining?
     Mining is a system that serves two distinct purposes:
         Determining the initial distribution of coins
         Synchronizing Bitcoin transactions




3   Written by Meni Rosenfeld                                 21/1/2013
Initial distribution of bitcoins
         Bitcoins are property; someone needs to own them when
           created.
             The inventor of Bitcoin? Not fair
             Equally to each person? Requires physical authority
             By software instances? Can be cloned/gamed
             By IP addresses? Centralized and arbitrary
             …?


         Distribution according to proof of computational work is fair,
           measurable, “pure” and has low overhead

         Long term, initial distribution doesn’t matter that much


4   Written by Meni Rosenfeld                                              21/1/2013
Synchronizing transactions
     Digital currencies have a problem called “double spending”
         The owner of a coin can try to use the same coin to pay two people
           simultaneously

     Centralized solutions are known


     The first decentralized solution is the blockchain (mining),
       invented in 2008 by “Satoshi Nakamoto”

     This talk is not about how mining works to synchronize
       transactions


5   Written by Meni Rosenfeld                                          21/1/2013
Mining hardware
     Mining involves a specific calculation – SHA-256


     Mining performance is measured in MH/s
         (Mega hashes per second)


     Types of hardware (performance per $1K)
         CPU: 10 MH/s
         GPU: 1,000 MH/s
         FPGA: 2,000 MH/s
         ASIC: 40,000 MH/s

6   Written by Meni Rosenfeld                            21/1/2013
Mining rewards
     Miners work & try to find blocks


     For each block found they get:
         Newly generated coins (currently 25 BTC per block)
           New coins gradually enter circulation
           New coins per block are reduced by half every 4 years
           There will never be more than 21M bitcoins


         Transaction fees (currently ~0.3 BTC per block)
           Bitcoin users pay them out of existing coins
           Help the transaction to execute faster
           Will become more significant going forward


7   Written by Meni Rosenfeld                                       21/1/2013
Inflation Schedule




8   Written by Meni Rosenfeld   21/1/2013
Mining difficulty
     “Difficulty” controls the number of hashes required to
       find a block

     Difficulty is adjusted every 2 weeks to keep the rate of
       finding blocks at one per 10 minutes on average

     Difficulty increases as more people mine –BTC
       generation rate is fixed, distributed in proportion to
       mining performance.

9   Written by Meni Rosenfeld                              21/1/2013
Mining pools
      Finding blocks is discrete, random and highly variable
          A miner expecting to find 1 block on average per month
           (~$360) will actually find 0-3 blocks
          Not good for cash flow or mental health


      Most miners join a mining pool, mine together and share the
        rewards
          Mining rewards in a pool are very close to average
          Many pools with different size, reward method and other
            features. Some good, some not so good



10   Written by Meni Rosenfeld                                       21/1/2013
Mining as an investment
      Buying mining hardware is a risky investment
          Future BTC price is unknown
          Future difficulty is unknown
          Might never reach positive ROI


      Running a mining operation requires technical expertise


      Capital markets help separate the two




11   Written by Meni Rosenfeld                              21/1/2013
The ASIC arms race
      Multiple companies are working on dedicated Bitcoin mining
        chips
          Butterfly Labs (multiple delays)
          bASIC (scrapped due to internal conflicts)
          Avalon (shipped yesterday!)
          ASICMINER (will mine itself, not sell hardware)
          DeepBit
      The advent of ASIC chips will be very disruptive
      Investing in mining now is even riskier than usual
      Seeing this transition unfold will be interesting

12   Written by Meni Rosenfeld                               21/1/2013
Questions?




13   Written by Meni Rosenfeld   21/1/2013

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What is mining, by Meni Rosenfeld

  • 1. What is mining? A bird’s eye view of Bitcoin mining Meni Rosenfeld 1 Written by Meni Rosenfeld 21/1/2013
  • 2. Introduction  Bitcoin mining consists in using computers to perform specific calculations, and obtaining bitcoins in return  Bitcoin is not about mining!  Bitcoin is a decentralized digital currency  Mining is the means to that end  A Bitcoin user does not need to do mining  This talk will touch on key concepts in mining 2 Written by Meni Rosenfeld 21/1/2013
  • 3. Why does Bitcoin need mining?  Mining is a system that serves two distinct purposes:  Determining the initial distribution of coins  Synchronizing Bitcoin transactions 3 Written by Meni Rosenfeld 21/1/2013
  • 4. Initial distribution of bitcoins  Bitcoins are property; someone needs to own them when created.  The inventor of Bitcoin? Not fair  Equally to each person? Requires physical authority  By software instances? Can be cloned/gamed  By IP addresses? Centralized and arbitrary  …?  Distribution according to proof of computational work is fair, measurable, “pure” and has low overhead  Long term, initial distribution doesn’t matter that much 4 Written by Meni Rosenfeld 21/1/2013
  • 5. Synchronizing transactions  Digital currencies have a problem called “double spending”  The owner of a coin can try to use the same coin to pay two people simultaneously  Centralized solutions are known  The first decentralized solution is the blockchain (mining), invented in 2008 by “Satoshi Nakamoto”  This talk is not about how mining works to synchronize transactions 5 Written by Meni Rosenfeld 21/1/2013
  • 6. Mining hardware  Mining involves a specific calculation – SHA-256  Mining performance is measured in MH/s  (Mega hashes per second)  Types of hardware (performance per $1K)  CPU: 10 MH/s  GPU: 1,000 MH/s  FPGA: 2,000 MH/s  ASIC: 40,000 MH/s 6 Written by Meni Rosenfeld 21/1/2013
  • 7. Mining rewards  Miners work & try to find blocks  For each block found they get:  Newly generated coins (currently 25 BTC per block)  New coins gradually enter circulation  New coins per block are reduced by half every 4 years  There will never be more than 21M bitcoins  Transaction fees (currently ~0.3 BTC per block)  Bitcoin users pay them out of existing coins  Help the transaction to execute faster  Will become more significant going forward 7 Written by Meni Rosenfeld 21/1/2013
  • 8. Inflation Schedule 8 Written by Meni Rosenfeld 21/1/2013
  • 9. Mining difficulty  “Difficulty” controls the number of hashes required to find a block  Difficulty is adjusted every 2 weeks to keep the rate of finding blocks at one per 10 minutes on average  Difficulty increases as more people mine –BTC generation rate is fixed, distributed in proportion to mining performance. 9 Written by Meni Rosenfeld 21/1/2013
  • 10. Mining pools  Finding blocks is discrete, random and highly variable  A miner expecting to find 1 block on average per month (~$360) will actually find 0-3 blocks  Not good for cash flow or mental health  Most miners join a mining pool, mine together and share the rewards  Mining rewards in a pool are very close to average  Many pools with different size, reward method and other features. Some good, some not so good 10 Written by Meni Rosenfeld 21/1/2013
  • 11. Mining as an investment  Buying mining hardware is a risky investment  Future BTC price is unknown  Future difficulty is unknown  Might never reach positive ROI  Running a mining operation requires technical expertise  Capital markets help separate the two 11 Written by Meni Rosenfeld 21/1/2013
  • 12. The ASIC arms race  Multiple companies are working on dedicated Bitcoin mining chips  Butterfly Labs (multiple delays)  bASIC (scrapped due to internal conflicts)  Avalon (shipped yesterday!)  ASICMINER (will mine itself, not sell hardware)  DeepBit  The advent of ASIC chips will be very disruptive  Investing in mining now is even riskier than usual  Seeing this transition unfold will be interesting 12 Written by Meni Rosenfeld 21/1/2013
  • 13. Questions? 13 Written by Meni Rosenfeld 21/1/2013