This article was taken from issue #3 of 21Cryptos Magazine.
Article 1 of 3 (Mining Series by @notsofast, a 21Cryptos Magazine exclusive)
In the beginning, there was only mining. If you wanted some bitcoins, it was up to you to head over to bitcointalk, download the open source Bitcoin code, compile it yourself, and set your computer’s CPU to start processing sha256 hashes in the hopes your work would discover the nonce of the next block’s header and earn you 50 bitcoins.
Sure, you could get someone to send you some as a test. But to generate yourself a Bitcoin address and receive them, you’d have to do 99% of that work anyway. So in the meantime why not type in one command line and wait for your computer to make a few on its own?
This is the foundational genius of cryptocurrencies, cryptoassets, cryptotokens, whatever you want to call them– this is what it is. If you have access to a computer, electricity to make it work, and a network to which you can connect… you can create your own valuable asset, from the work you do with those tools. By the power of mining, if you are able to get online, then you have access to income, to safe savings, to purchasing power. You don’t have to buy anything. You do not need anyone’s permission to hold (hodl wasn’t invented yet!), save, spend or trade your bitcoins. Your wallet is a node on a network of money. All nodes follow the same rules, and reject those who break those rules.
Nobody can tell you whether or not you’re allowed to participate in the bitcoin ruleset, and the Money-over-Internet-Protocol it enables.
Specifically, nobody who is normally in charge of the money and valuable assets people generally use: governments. This ethos is why Libertarians fell in love with Bitcoin so hard! This is also where I first entered the story.
I’m not a hardline libertarian, so although I thought the philosophy of Bitcoin was cool af in 2011, I wasn’t super interested. Libertarians are not a dominant force in society, I reasoned, and if Bitcoin was money for Libertarians, Bitcoin couldn’t ever be a dominant force in money. So when I downloaded a Bitcoin-QT wallet, I didn’t bother typing setgenerate true -1 into its console, and I left it on my hard drive to rot.
Until the end of 2013, when I found a Dogecoin meme on Imgur. Immediately I recalled that cranky Bitcoin ethos, and liked how Dogecoin’s irreverence turned it around and spanked its ass. Here was a version of Bitcoin that didn’t take itself too seriously… that had a random block reward for the hell of it… that had a massive supply so anyone could have and use a whole bunch… this was a version of MoIP I could get behind.
I love underdogs. I love memes. I love trolling those who take themselves too seriously. And I believe, or did at the time, that Planet Earth is just crazy enough for Dogecoin to challenge Bitcoin, as an implementation of it that more people — MOST people — might end up actually using.
I wanted some. I downloaded a DOGE wallet and visited faucets that airdripped me tiny amounts of DOGE. It was an awesome first day as a cryptocurrency fan. But on Day 2, the faucets were empty. And I still wanted more Dogecoins.
I didn’t want to sign up to a shady website and send real dollars to buy bitcoins and then turn around and buy dogecoins with those bitcoins. That was a ridiculous idea, to trust multiple websites to take my real money for my intangible playcoins. So the remaining option was to buy a couple of gaming GPUs I could sell later if/when the hobby died out, and make them myself.
This is how LOTS of people got into crypto, and stayed. We were Dogecoiners. We could create our own money for fun.
And then Dogecoin pumped like hell on the cryptomarkets, and suddenly our hobby became for fun AND profit. The profit started to change everything, and FAST.
First the PC gaming community had flexed its build skills. Its members had begun adding more than one GPU to a computer, making even the most tricked-out gamer’s rig look like an empty box by comparison, all in the name of tweaking for more bitcoins more efficiently. Then miners had begun building and running multiples of these Frankensteins, in parallel, creating a run on the retail GPU market that left shelves empty to the puzzlement of big box stores, totally throwing the “I’ll just resell to gamers” backup plan out the window (unless you knew like ninety basements’ worth of gamers).
Then dedicated ASIC machines hit the marketplace, designed to only mine Bitcoins, making everyone’s investment in bitcoin-mining GPUs instantly obsolete — but they could still mine Dogecoins (or Litecoins or several other coins), and dump them for Bitcoins, or trade them for profit, or HODL them tight.
New variations of Bitcoin with parameters designed to be better and fairer than bitcoin started springing up, rallying miners to support them and earn mounting value for that support.
We saw altcoins challenging Bitcoin’s status, or altcoins that defied Bitcoin’s sha-256 ASICs by using new consumer hardware-mineable algos. We saw novelty coins, scamcoins, colourcoins, themecoins, you name it. We saw a dozen new coins to mine, every day. Miners could employ multiple strategies to earn wealth in so many ways that played to individual strengths– computer hardware chops, trading skills, a knack for identifying good projects before anyone else– mining became an edge that PAID.
The crypto network of money grew and mining grew with it. Today we have giant Chinese farms burning cheap coal to mine bitcoins and offloading the environmental externality costs to the planet’s future. We have hundreds of mineable currencies and hundreds more that you only get by buying, not mining. We have coins using algorithms that can only be mined with CPUs, or GPUs, or their own special ASIC machines.
For every thousand people that have read an article saying Chinese farms have a monopoly on mining crypto, there is a home miner out there exploiting the gap between that idea and the truth, and making BANK. You know how you lord your 5x ICO gainz over traditional investors who used to brag about their banner years of 20% profit?
Mining for profit can exploit a more complex game theory interaction of timing, economics, and information asymmetry to make that 5x look just as silly. (How silly? I will not get into specifics here, because a) it is good practice to show not tell; b) it is better practice to keep this hypothetical and devalue miners as targets for hax; and c) you wouldn’t believe the gainz, dear reader.)
Yes, there are plenty of ways to make money in crypto besides mining.
You can buy ICOs whose tokens live on other networks. However, when you buy an ICO at retail value, you are paying its issuers what they have dictated that their “This is how LOTS of people got into crypto, and stayed. We were Dogecoiners. We could create our own money for fun.” “Then dedicated ASIC machines hit the marketplace, designed to only mine Bitcoins, making everyone’s investment in bitcoinmining GPUs instantly obsolete” project is worth. But do you trust the ICO issuers not to give massive discounts to secret bulk buyers, whose breakeven on the investment is one tenth what yours is, in order to raise more money for themselves? Do you trust them not to buy their own ICO tokens to inflate their numbers for the sake of promotion?
Do you even trust they need the massive amounts of money they say they need in the first place? Between the initial ICO valuation period– where the issuers tell you how much their project is worth, by stating what they “need” to raise– and the later period, after the trading market for their tokens matures, the token will go through something called price discovery.
This is where the market, over time, figures out what the project is ACTUALLY worth, by reaching an equilibrium between buyers and sellers.
That equilibrium, for a pre-product pre-income venture, is almost always going to be lower than the ICO’s number of tokens outstanding times its full retail token price as issued, due to the issuers’ greed or optimism, and the discounts only the issuers can truly quantify. Fundamentals – which at the beginning are just vapourware promises and unauthorized pictures of Vitalik Buterin as an Advisor – only matter as a speculative premium on price, until and unless that venture gets a product, a userbase, and revenue. This boils down to one thing: price discovery for an ICO is probably going to start high and trend downward, and as an investor, you are fighting against those odds. And we’re not even going to get into how the American SEC wants to protect you from those bad odds…
You can buy tokens who secure their respective networks via Proof-of-Stake, for the passive income.
PoS is fantastic, but it’s got an inherent problem: vulnerability to a Sybil attack, where an attacker spoofs (pretends to be) a whole bunch of unique nodes on the network, and coerces the network to his favour, without anyone else knowing the network is full of fake nodes.
There are decent bandaids, and even better tech on its way to fixing this with finality, so I don’t suggest you avoid PoS because of Sybil attack risk, just know that it exists.
However, PoS’s reliability at scale isn’t as conclusively proven as Proof-of-Work or PoW mining is. You may, as I often do, value the passive income from PoS projects more than the risk of Sybil attack. But you’ve assessed that risk by looking at stake generation and the richlist in the block explorer, right? Right?
You can get airdrops. These are pretty sweet: you get tokens for free. Oh, except you have to fi ll out a form on a website that fi ngerprints your browser, OS, and IP address, and serves you an ad with a password-stealing keylogger in it. Or you have to download a wallet with a trojan in it that steals all the other crypto on your computer AND creeps your webcam. Or I’m being a pessimist and these free tokens are legit and make it to a marketplace where they trade for… almost zero.
(What did you expect for free?!) There are always rare exceptions of legitimate airdrops from which you can grind out some additional working capital, even valuable airdrops, but these are few and far between.
Notice a similarity between these three ways to get crypto? They all require you to buy at someone else’s price, or jump through someone else’s hoop, in order to participate. Mining is unique in that you can make a capital investment with resale value, and then forever choose what to mine, or even whether to mine at all. You are in control. Unlike PoS, you can mine whatever you want, rather than only produce small amounts of the asset you bought (or some specifi c related asset).
Unlike an ICO, you know your mining costs and can choose the effective price you pay via mining breakeven, rather than taking an issuer’s word for it— and no agency has to give you permission, or legalize over what work your computer does to reward you. And unlike airdrops, you can choose what you want to earn, when you want to earn it. Sure there are unique risks to mining, like a pool not paying you, or capital depreciation/obsolescence of your rigs, but you can account for these. They don’t stand in the way of your full and complete control.
Maybe most importantly, mining introduces you to an important set of fundamentals you may have ignored in your investing. If you’ve bought a PoW coin without knowing what it cost to mine it, you may have been the other side of the trade belonging to a spec miner taking extreme multiples in profit.
From your pocket. This is the information gap I mentioned earlier, which directly pays miners. No information gap or profit opportunity? The miner turns off the rig, or points it somewhere else. Information gap that can reduce risk or increase profit? The miner turns on the rig and mines like hell.
You want to be the miner, don’t you?