An enigmatic start-up, formerly called 21E6, now re-branded as 21, is doing “top secret” bitcoin-related things in San Francisco. They have recently raised stratospheric funding. Their secrecy has lead to all sorts of free marketing.

Reading all the speculation is painful for me as a participant in the bitcoin ecosystem. 21 wants to bring mining back to all home users by “giving” them internet-connected devices that pay for themselves by mining. Home mining is dead. For good. There’s no bringing it back, and no proof-of-work that uses electricity will ever make sense to run out of your house. It’s just too expensive.

That said, it’s incredibly important that we all see value in our participation in bitcoin through things like mining and operation of a full-node. Bitcoin is the most liberating and self-empowering tech the world has ever seen. It deprecates entire industries — banking, identity, and escrow to name a few — freeing people to learn new things and solve new problems. But, it only works with mass participation (I would argue, through services like Bitmain, Spondoolies, HashPlex, and Blockchain.info, but I’m pretty biased).

There’s a long history of “cloud-mining” companies that run the spectrum from dis-empowering rip-offs to pyramid schemes. It’s no wonder mining has seen great consolidation. I worry that 21 will only further entrench distrust in the mining industry when customers discover how much they pay (in electricity) to run 21's equipment (mostly for 21's gain).

Before I go too far off the rails, let’s explore some background.

The economics of bitcoin mining

Bitcoin mining is fundamentally a process whereby we put in electrons, and we get out quantifiable amounts of “work” for which “anonymous” people & machines on the internet will pay us (because that “work” helps to create a system of distributed time-stamping, which can be leveraged into a global, distributed ledger of signed inputs and outputs). The key here is that mining (in the simplest sense) follows this state diagram:

electrons → BTC

Miners as the Fed

Bitcoin miners play the role of the Fed. They enforce the rules. The core-developers write the rules, but the miners enforce them. If the majority (or even a large minority) of the miners disagree with the devs, there’s all kinds of funny business they can get up to (just a few examples below).

The most canonical example of how a large group of miners would protest a decision of the core-devs is to

fork the chain with their own rule-set apply hashrate to the original chain and publish empty blocks or blocks filled with spam transactions (ramping up the difficulty in the process) (if they have more than half the hashrate) re-write recent portions of the chain (stealing the coins published in those portions) after the next difficulty adjustment, pull their mining power off the chain back onto their own chain, and let the hashrate that remains on the original chain work against a disproportionately high difficulty (dramatically slowing confirmation rates)

This results in a very healthy tension: Miners depend on the core-devs to be forward-looking and maintain an economically sound rule-set. The core-devs depend on the miners to enforce their rule-set and strengthen their chain against attackers or competing chains.

Thus, as a holder of bitcoin, we have an interest in holding some proportional amount of mining power so that we get to help decide the future of The One Best Chain. A bitcoin holder without mining power has voiceless, helpless entries in a distributed database that are (for the most part) along for the ride.

End-Game Economics of Mining

Naturally a miner wants to make BTC as cheaply as possible. There are two ways to do this:

Make a chip that produces cryptographic work as efficiently as possible (minimize electrons / hash). See Bitmain, Spondoolies-Tech. Find cheap electrons. See Iceland ($0.015 / kw-hr), China ($0.03 / kw-hr→ Free), Washington State ($0.027 / kw-hr)

The path of bitcoin mining is paved with the (still warm) graves of companies that have failed to do (1) successfully. See HashFast, Alydian, Cointerra, Aquifer, Biostar, BTC-Digger, BTC Garden, CLAM, DigBig, Hashra, iCoinTech, Land ASIC, TMR, and many, MANY more. To watch fires in progress see Butterfly Labs, Bitmine/Innosilicon, KNC Miner, ASICMiner, Black Arrow.

In any market, margins tend to settle out after a while. Some people use the “1–3–9 rule” (cost of goods sold (COGS), distributor cost, retail cost). Some use “the rule of pi” (about 1/3 of the retail price is won by each of the manufacturer (COGS), the distributor, and the retailer). I would contend that the profits of miners will settle out at around triple the lowest broadly-available (un-subsidized) power cost in the world.

From this we can very easily see how various business models work (or don’t).

Let’s assume that lowest broadly-available, un-subsidized power cost is around $0.02 / kw-hr. Armed with our understanding (assumption) above, we can say that (in some idealized far future), for every kilowatt of mining equipment that we run for an hour, we will make $0.06. If the price of Bitcoin goes up, people bring more mining power online; if the price goes down, people shut off less efficient hardware. The returns might deviate over the short-term, but they are certain to settle into something like $0.06-$0.08 / kw-hr in the long-run.

Ok, now that we’ve set the stage, let’s make some money (and hopefully debunk some ideas of what 21.co is going to offer)!

Mining on a phone

A typical cell-phone has a thermal design power (TDP) of 2 to 5 watts. Let’s assume all of it could be devoted to mining.

Profit / Month = 0.005 kw * $0.06 x 24 hours x 30 days = $0.22 / month

They’re not putting a miner on our phone. Moving on.

Mining on AC power adapters

We have roughly the same case as our phone here — our power adapter needs to be able to dissipate some heat (let’s say 20w). We make money at 4x the rate of our phone. But… this is still just under a dollar a month, and now we have to add a wifi card to our power adapter which costs us another $10 (adding 10 months of amortization time). We need a device with lots of power that already needs internet connectivity…

Mining on a home router

The only possible model here is they give us a router with a full node and a mining chip in it. Free router! Yayyyy! Let’s look at the economics.

A standard home router has a total design power of about 5 watts. Let’s assume they ship everybody something a bit beefier though. How about 100w (the wattage of a macbook pro charger)?

Profit = 0.1 kw * $0.06 x 24 hours x 30 days = $4.32 / month

Assuming this device costs something around $100 (wherein $80 is devoted to mining hardware), this device pays for itself in about 2 years. Quickly we’ll find an interesting relationship — that the time to payoff doesn’t relate to the size of the device. Let’s go big!

Mining with a hot water heater

We found that if we pump in more joules, we make more money. Where do we put in lots of joules in our lives? Baseboard heaters! Stoves! Dryers! HOT WATER HEATERS!

A typical electric hot-water heater draws 3 to 4.5 kilowatts at full power. To the maths!

Profit = 3 kw * $0.06 x 24 hours x 30 days = $129.60 / month

This looks pretty great until we realize that hot water heaters have a heating element which is on for 1–5% of the day. Now we’re back down to ~$4 / mo.

But! We could use it to keep the water warm at off-peak times… which requires ~30–100 watts… making us ~$1–4 / month.

…

Ok, so what about space heaters (crosses fingers)?

Mining with a space heater (that identifies as some other internet-&-blockchain-connected device)

This is were we start to dig in and things get interesting. Let’s define some complete, built-at-scale Cost-Of-Goods-Sold-per-kilowatt of mining power (built at the 14nm Samsung node) that we would actually want in our house. We can split hairs here (lower-efficiency → lower built cost, etc.), but it’s not critical that we get it right since it just gives us reference amortization rates (how quickly the space heater pays for itself — what we care about). As a proxy we can use something like the Bitmain Antminer S5. (In reality, 21 will spend more than this per kilowatt for something built at 14nm, but let’s be conservative for the sake of argument.)

Built Miner Cost @ 14nm / kilowatt = $500

Let’s find our time to break-even @ 100% duty cycle:

Time to break-even = $500 / ($0.06 * 24 hours * 30 days) = 11.57 months

This means that over 12 months, if we kept our 1-kilowatt heater on 24 hours a day, 7 days a week, (and it magically reconnected itself after power outages & internet outages, and never crashed [listens for laughter from fellow miners]) we would make back the $500 COGS.

Let’s look at how much we spent on power during that time. The average american household gets their electricity for $0.12 / kw-hr. This means we also spent $1000 on electricity. Some might see this as a horrible net loss, but that isn’t the case. Neglecting the $500 we spent on a small-ish capacity space-heater, what really happened was that we got a discount on electricity. Neglecting the COGS, we spent $500 for 1 kilowatt of heat throughout the year instead of $1000.

This is marginally interesting… until we consider that most people don’t run their space heater 24x7. I’d venture a guess that the duty-cycle is in fact (much) less than 50% (vacation, summer, … most daytime… probably all contribute to low duty-cycle). Our duty-cycle is directly related to our amortization rate — if we only have our heater on at night during the winter (we’ll say 8 hours / day, 4 months / year) our 1 year payoff turns into a 9 year payoff.

It happens that this is also why most renewable energy (except hydro-power) sucks — low duty-cycle. The sun tends to go down. The wind tends to stop blowing. This means that the power company still has to finance the full capacity with non-renewable sources (again, excepting hydro-power) like natural gas, coal, and nuclear (they don’t want the grid to go down if the wind stops blowing, right?). This has an unintended negative consequence — it actually causes the price of mixed energy (e.g. solar + coal) sources to be more expensive than their non-renewable counterparts (e.g. just coal) — even if the renewable energy sources are actually significantly cheaper to operate. I digress.

Our marginal interest in our BTC mining heater likely fades toward disgust when we consider what we could have purchased instead — a heat pump. 1000 watts is equivalent to 3400 BTUs (British Thermal Units — they always wanted their own units, didn’t they?). A casual search yields a typical cost of $100 to $200 per 3400 BTU of heat-pump capacity.

So, we decide to buy $200 of heat-pump capacity instead of a $500 1000w bitcoin space-heater. What do the numbers look like? Well, it seems that typical heatpump efficiencies are about 2 to 4x that of common electric, resistive heating elements (i.e. for every watt we put in, we get 2 to 4 watts at the condenser — the thing blowing warm air into our house). So… now we’re using 300w of electricity to get 1000w of heat. Unless I’m missing something, we’ve now saved ourselves $700 in electricity.

How to not suck at bitcoin mining (an aside & shameless plug)

For the foreseeable future, it makes a lot more sense to host our mining equipment. In reality, if we’re not running our space heater to heat our home 24x7, we’ll likely be wasting our money (and even then, we probably still will be by neglecting to use a heatpump). It’s my guess that hosting companies will slowly lean towards profit sharing with customers in exchange for customers’ putting up the cash for mining hardware (remember that “rule of pi” ratio?) — leaving ~$0.02 / kw-hr for their power costs, ~$0.02 / kw-hr for operational costs, and ~$0.02 as a split of customer & hosting company profit.

Does this mean mining is broken? Not in the slightest. “Centralization” the crowd yells! I disagree. There seem to be tens (if not hundreds) of options — all geographically distributed. All it means is that the boxes aren’t running in our house (and wouldn’t we rather that they not be there anyway?).

Find a service that provides power off renewables, and send equipment there. The water running through a dam (for example) will be dissipating energy in its descent of the river whether we take advantage or not. It might as well induce entropy generation in a more controlled and measurable fashion (and make money while securing the blockchain).

What is 21 building?

We’ve established from the above (rant-warm-up) that 21 can’t (sustainably, with a straight face) sell anything that mines bitcoin in our house as a network-connected device masquerading as a “heater.”

They are clearly already in the mining business (their mining pool, pool34 was recently outed and is humming along nicely at 3–4 petahashes / second). They are clearly building an ASIC (Application Specific Integrated Circuit, commonly called a “chip”). The question is, for what? A few possibilities:

A mining ASIC for SHA-256 (the hashing algorithm bitcoin uses). An integrated hardware “wallet” for mobile. A mining ASIC for a new proof-of-work & chain (SHA-3 + A16Z3000?).

Let’s have a look at each, shall we?

A mining ASIC for SHA-256

Right off the bat I’m going to say this is the highest probability (Occam’s razor). The question is, what will be interesting about their ASIC in comparison with others that have come before?

In case you haven’t had a look, SHA-256 is an open specification with reference implementations in hardware description languages. I’ve built my own FPGA-based systems that have run it: