"lower prices lead to centralization"


#1

From Technical AMA w/ Zcash team December 14, 2018 noon PST

  1. We’re aware that lower prices leads to centralization.

I don’t know if I agree withthis. Maybe with lower prices, the for-profit (and large) mining operations shut down, leaving a diverse collection of hobbyist, ideological, and small-scale miners. Or maybe the opposite! Who knows.


#2

I’am pretty sure it leads to centralization, or better said to geographical mining centralization.

Sure, there are always some hobbyist and ideological miners, but compared to the professional minors these are for sure an absolute minority that don’t really count or change anything.

The principe and formula or thought on this is pretty elementary and straight forward:

  • with every price drop of the mined given crypto currency the profit gets smaller for the miner.
  • miners or mining operations with higher electricity costs get forced out first of course.
  • The side effect of this is that competition to the low electricity cost countries and regions gets removed/forced out and can/will be replaced within these countries/regions. This even doubles the centralization factor.
  • Large mining operations and facilities are anyway build within such low electricity areas and/or ensure their power supply their own and lowest prices. The guys that build the bigget mining operations for sure know the basics of economy and that with lowest electricity prices the profit is bigger, again just logical and common sense.

I’am pretty sure this applies and happens right now. I myself closed my whole mining operation last week, having in mind that in my european countries we have one of the lowest electricity prices within the EU. What’s left for these in Germany, France, Italy and so on?

But ok, let’s just in theory assume, no matter we mine without profit or even with negative outcome we continue to mine. What would be the result?

For the countries with high electricity cost miners:

  • We have to spend all income on electricity or even sponsor the mining operation with other funds, savings, whatever to continue.

The countries/regions with very low electricity costs still continue to mine as still profitable, able even to buy more hardware from profit.

The effect would be again about the same, obviously. We can fit it up like that for this case:

  • For High electricity cost regions. With every new unit we buy we struggle even more to pay for electricity from other sources.
  • For Low electricity cost regions. With every new unit they make even more profit able comfortable to buy even more hardware.

I will try to make a ZEC centralizatoin mining map, enough i find some volunteers that help putting together electricity prices from all over the world. This will show directly where mining operations are and will be concentrated and even more important, which countries and regions are unable to mine at a given price.


#3

One could also argue the opposite; higher prices shut entry level user out and lead to big corporations having more control of the coin supply.

Higher prices could also serve as an incentive for big conglomerates to make large capital investments in mining equipment because they are the only ones who can afford to mine at large scale. Thereby rasing hashrate to beyond the reach of the hobby miners, and also leading to centralization.

[EDIT : to note that I remain agnostic about the actual Zcash price, just playing devil’s advocate for the sake of conversation]


#5

A higher price won’t force out the average miner for sure. He can still mine with profit. Of course big corporations and companies can as well invest more, no doubt, but at least they would have competition at higher prices from a lot of other regions and countries. With low prices this competition is just … eleminated automaticlly which gives them an even bigger advantage.

Let’s assume ZEC price is USD 200 right now. Miners from a lot of countries that currently can not mine would mine opposing the big corporations on hashrate. Of course it would raise difficulty but within that as well lower the big corporation’s return. On low prices you don’t have this effect as with every exiting miner from a higher electricity country automaticly the low electricity region miner gets an advantage, free!


#6

For everybody interested here allready the attempt to make a list of all regions and countries with electricity prices. It’s clearly visible that most countries and regions are allready out of the mining game.

Just to give some examples:

The german home miner with 33 cents per kw/h has to compete versus the chinese industrial miner at 2-3 cents.

The english home miner with 21 cents per kw/h has to compete versus the 2.4 cents industrial russian miner.

These are powerfull western countries that invested in the past a lot into hardware but are not any longer for sure. Means all this hashpower gets shifted towards some few low electricity regions/countries. What’s left even for the countries with less buy power and higher electricity costs?

Additonally, once these low electricity cost countries/regions have the main hashpower over time even later at higher coin prices it would be extremely difficult for the higher electricity countries to catch up again due the allready higher difficulty network level…


#7

In Summer 2018 it was estiminated that for BTC mining the facilities are located as following:

60% China
15% Georgia
7.5% Sweden
3% US
~15% other countries

That’s worse enough in my opinion, but with recent or even lower coin prices these percentages get shifted even more. Sweden is mostly the next victim along with several % from the other countries… Just logical and no rocket science at all.

P.S. & edit: Seems the biggest swedish mining facility went allrealy bankrupt…


#8

I totally agree with @boxalex there is correlation to price of coins, electricity price and their distribution.

There are only few coins now mineable with GPU cards, and a lot of people with mining rigs, which reduced profit for GPU miners. After BTC drop from 6500 to 3500$ I’ve shut down my mining rigs due to lack of profitability.


#9

If the price is low msking asics will not be viable economically but it would be cheap for an hostile entity to attack the network.


#10

My gpu rig is old hardware, even when Zcash was ATH I make more $value now with the mini
Otherwise I would still be running the gpu rig at a “considerable loss” I guess you’d say (I use it as a workstation for now) but I mostly HODL, profitability doesn’t matter just so long as my electric bill isnt too insane because I have to pay it anyways (if anything I trade $$ for :zcash: ) I like that the price is lower, its less I owe on taxes
Incentive for me is different but may not be for some others (which is evident) so the question becomes what incentives extend beyond profit? Hashrate is as high as ever so incentive is there.So far as I’m concerned those who mine solely for profit constitute centralized entities within the environment and it’s probably better that they’re more spread out, with profitibility the less $ they make the more :zcash: they sell which increases distribution
I’m going to stop here because it just leads back into harmony mining ideas which I’ve expressed


#11

How could you argue against a large mining farm that gets bulk discounts on ASIC’s and is placed in an area with low electricity costs (<.05)? If the price goes low long enough for these large outfits to go bankrupt then maybe small scale hobbyists can get back in, but the risks of a 51% attack will also be much higher at the same time.


#12

Agreed. However, bevor these mining facilities with 2 or 3 cents electricity costs get bankrupt ZEC must go as low as USD 5 mostly (a guess, didn’t make the calculation yet, but will make soon!).
In case of such low prices i would be more worried about the foundation and Zcash co than, lol…


#13

Actually that’s exactly the 2nd example i made for Zooko some posts above and perfectly fits in.

Again… Of course you can mine while losing money. But than again:

  • how many really do this and to what extend? I think it’s fair to say that these mining long term at a lose are either very small private miners and/or only short time or both of course. The end result is the same at the end of the day. While you mine at lose you can’t buy new hardware, you won’t ROI, you won’t anything at all. Additioally you in most cases you have the sell pressure to cover at least some of the lose mining costs. Compared to the guy in a 2 or 3 cent region which comfortable can lay back and make daily huge profits, new investements and even doesn’t need to sell much to cover his running costs.

  • Just again, compare German 33 cents per kw/h with some chinese miner at 3 cents. Just right now i used these numbers on whattomine. The German miner makes right now a lose of -$1.40 per day per overclocked Z9 mini while the chinese 3 cent miner is at +$1.48.

  • The chinese miner right now and today with 1x Z9 mini overclocked pays about ~$0.29 per day for electricity while the German one has to pay daily ~$3.17. That’s a huge difference per unit.

  • I would argue about the more distribution argument as well, but all over it doesn’t matter at all as my personal concern is only about geographical mining centralization due elctriity prices. What happens later with every ZEC mined is a different story. But statistically i can oppose the distribution argument with the switch from GPU’s with about 120k active wallets and one month ago with Asics with only about 25k active wallets. I’am pretty sure the active wallets will lower further and in some days i will check again if this value has increased or decreased but i bet on further decreased.

  • Sure, here and there some guy might mine at a lose for a given period, maybe even forever. But how many are these? How much impact have for example 3x Z9 minis compared to the chinese or georgian facilty that buy monthly 100’s or 1000’s? In my opinion it’s fair to say that these mining operations in countries that mine at a lose have about zero impact on the network…


#14

I think the Regional cost of electricity will be less relevant if Zcash is able to be mined on a large number of devices people already use like cell phones tablet low end computers somehow comparable to asics (I think it would really boost adoption and go even further to disincentivize Farms)
But then the problem is still the same you’re paying money to do meaningless work that doesn’t really get you much in the end so how do you incentivize somebody to essentially pay it forward?
If the work was meaningful (beyond just securing the network) then the idea of non-profitability becomes charity, you’re STILL earning Zcash but for charitable work that could have serious, positive, TANGIBLE potential


#15

If the consensus protocol was very simple being bound to non meaningless (outside of securing blocks) work by way of timed verification of small work units of the larger continuous work then it would be unaffected by clocking up and down, the speed of the non meaningless work would be affected but would give that person who maybe pays more for electricity the option of spending less to earn the same amount of zcash as someone who pays less for electricity and maybe wants to clock up just because it’s something beneficial and that they want to do like protein mapping or working some mathematical or scientific conjecture


#16

Here is what is happening all over the world now, of course expensive electricity regions first


#17

All those rigs dispersed, how terrible
It’s almost like this video is a plea to the algorithmic bot traders to just stop lowering the price because he obviously didn’t plan for this at all! Robots don’t care how sad you are! The hashrate is as high as ever, ATH YESTERDAY


#18

I am a hobby miner, currently running three Mini Zs at a small loss in the hopes of prices rising. Electricity rates in Alaska where I live are $0.23 per KWh.

But I believe in the project and am willing to support Zcash at a loss, for a while.


#19

How long is for a while in your case?
If ZEC goes down in price as low as 20-25$ how much longer would you be able and willing to mine it? Honest answer would be appreciated.


#20

Since the loss is basically just my inflated electricity bill that is automatically payed monthly from my checking account it isn’t so painful because it is hard to quantify. My five kids always leave every light on in the house. Christmas lights are lit on the house 18 hours a day. Our three vehicles are plugged in for 2-4 hours daily (Alaska weather).

With that being said I would imagine if in six months when it’s summer and the price hasn’t rebounded I would switch off two of them and just run one, strictly as a way of being part of this revolution. Believing in something can cost money or time. I have no doubt that within a few years “crypto winter” will be over and surviving projects such as Bitcoin and Zcash will hit all new highs again.

Until then I am still slowly DCAing my way into financial freedom, and I look at Zcash as my Swiss Bank account, saving up for a rainy day.


#21

Interesting article i just found by accident. In short, lower coin prices force out high electricity cost miners first but make low electricity miners comfortable continue to mine since a difficulty drop is all in these favour …

https://blog.bitmex.com/the-price-crash-the-impact-on-miners/