The Bitcoin Mining Landscape in the Past Decade

This article was first published on October 20, 2018, on the Chain Catcher WeChat public account, by author Wang Aci.

1. Genesis

In early 2015, Chinese chip design expert Zhan Ketuang, a graduate of Tsinghua University, was troubled, unsure of how to start designing a new processor. One night, while reading the representative work "The Three-Body Problem" by science fiction writer Liu Cixin, he had an epiphany when he came across Chapter 33, "Sophon"—to unfold ordinary protons in lower dimensions, etch large-scale circuits, and turn them into "strong artificial intelligence," then compress them back to the size of protons in higher dimensions. The Trisolarans used this tool to lock down Earth's foundational technology and monitor the solar system, calling it "Sophon."

Subsequently, Zhan Ketuang discussed a plan with Wu Jihan, naming it "Sophon," to apply the ASIC technology used in mining machines to the field of artificial intelligence, developing deep learning chips based on ASIC technology.

Michael Bedford Taylor, a professor at the University of Washington, predicted after researching such chips that these types of chips, known as Application-Specific Integrated Circuits (ASICs), could execute single functions very efficiently and might lead the development of the next generation of distributed computing.

Bitmain's rapid development confirmed the professor's prediction. Just two years after applying ASIC technology to produce mining machines, in August 2017, it secured $50 million in Series A financing from Sequoia Capital, IDG Capital, and others; a year later, in July 2018, it completed a Series B financing round led by Sequoia Capital, raising $290 million and achieving a valuation of $12 billion; in August of the same year, it completed a B+ round of financing, raising $440 million and reaching a valuation of $14 billion…

Perhaps even Zhan Ketuang and Wu Jihan did not anticipate that Bitmain, at just 5 years old, could rival Nvidia, which was 24 years old, and stand out in the 2018 Hurun Unicorn Index, ranking 13th among 12 industry giants such as Ant Financial, Didi, and Meituan.

The emergence and rapid development of Bitmain reflect the tumultuous development history of the mining industry that has emerged from Bitcoin over the past decade. Tracing back to its origins, on January 4, 2009, at 2:15 AM, Satoshi Nakamoto, hidden in some corner of the world, struck a decisive blow, creating the first and only block on the Bitcoin network with an ID number, known as the "genesis block."

The genesis block mined by Satoshi Nakamoto

Under the shadow of the 2008 financial crisis, Satoshi Nakamoto wrote a satire on the old world's financial crisis in the genesis block: "On January 3, 2009, the Chancellor is about to announce the second round of bank bailouts."

However, this satire did not attract the attention of mainstream media. In the initial years of Bitcoin's operation, it was a carnival for a niche group on forums.

Thanks to this, in the early stages, ordinary computers' CPUs could play the role of "mining," and the process was simple: download mining software; create a text file, input parameters such as mining pool, miner ID, miner password, and thread count, save it, and change the extension to .bat; open the mining software to start mining.

After realizing the importance of hash rate to Bitcoin mining, miners from various places entered the scene, completely breaking the balance of the situation. Controlling the hash value in blocks became a battleground for many Bitcoin companies, and the key to this technology depended on how to increase the number of transactions processed by the Bitcoin network within any given time frame.

Thus, supported by the computing power of continuously iterating professional mining machines, a prolonged battle in the mining industry unfolded across the globe. Over time, in the ever-changing blockchain market, mining has developed into one of the oldest industries in the field.

2. Personal Mining

As early as 1982, David Chaum, who had just completed his Ph.D., published a paper on signature technology, proposing for the first time the anonymous transmission of value over the internet, that is, storing traditional currency in digital form through bank cryptographic signatures, allowing it to be transmitted freely and anonymously online.

Ten years later, a group of cryptography experts, programmers, geeks, and enthusiasts who believed in David Chaum's ideas initiated a social movement called "cypherpunk," which aimed to create a free and unmonitored world through cryptography.

In 2008, the Bitcoin white paper was published on the cypherpunk mailing list. Although it did not attract global attention, its decentralized and freedom-advocating spirit resonated strongly with the cypherpunk movement, naturally bringing it to a climax.

One of the members, cryptographer Hal Finney, was thrilled to see the Bitcoin white paper and immediately contacted Satoshi Nakamoto. Shortly after the genesis block of Bitcoin was created, Hal Finney downloaded the Bitcoin client and pointed out vulnerabilities in Bitcoin's operation multiple times via email, to which Satoshi Nakamoto replied with fixes and thanks.

On January 11, 2009, to test Bitcoin's transaction functionality, Satoshi Nakamoto transferred 10 bitcoins to Hal Finney. This was the first transaction in Bitcoin's history.

The first transaction in Bitcoin's history

At the same time, Hal Finney began mining with his IBM computer, and due to the lack of competitors, he mined up to 100 bitcoins a day, making him the first miner in Bitcoin history.

Hal Finney believed he was more optimistic about Bitcoin's future than Satoshi Nakamoto himself, but fate played a cruel joke on him. In August of the same year, he was diagnosed with amyotrophic lateral sclerosis, and for the next few years, he struggled against the disease.

Even in the final stages of his life, Hal Finney, who could only move his eyes, continued to type out lines of code for the official Bitcoin wallet with the help of an eye tracker. Hal Finney passed away in August 2014.

During Hal Finney's gradual retreat, the concept of Bitcoin spread rapidly in the Western world, attracting the first batch of libertarian followers with its strong ideological color, who later often referred to themselves as "true believers in Bitcoin."

Due to the low difficulty of early mining, individuals could directly mine with their computer CPUs, and the profits could exceed electricity costs and machine wear, making it much easier to attract miners compared to the need for expensive equipment. Thus, the craze for personal mining gradually spread, even reaching the Chinese internet circle across the ocean.

In June 2009, Wu Gang, the CTO of a P2P storage website, unexpectedly received an email introducing the Bitcoin system. As a tech geek, he immediately downloaded the mining software and ran it on the company's computer.

"Free, democratic currency; a public, unhackable database." Wu Gang described his understanding when he first encountered Bitcoin in an interview with GQ. However, at that time, he denied the possibility of Bitcoin becoming widespread. After mining over 8,000 bitcoins, he turned off his computer and withdrew.

At that time, 37-year-old Li Xiaolai was busy starting a study abroad consulting company with friends; 23-year-old Wu Jihan had just graduated from Peking University with degrees in economics and psychology and entered the venture capital industry… The Chinese were temporarily absent from this social experiment of Bitcoin.

3. Initial Scale

In February 2010, the average computing power of a Bitcoin block had increased fivefold from the 4MH/S when the first digital encrypted block was mined. CPU computing speed could no longer meet the higher difficulty mining algorithms, and hardware technology needed improvement.

However, due to the profitability of CPU mining, even though the utility of GPU (graphics processing unit) mining was recognized early on, its use was repeatedly delayed for better dissemination. Even Satoshi Nakamoto himself suggested in a post on the Bitcoin community on December 12, 2009:

"We should have a gentleman's agreement to postpone the GPU arms race; this would be better for our network. Because this way, it would be easier for us to gain new users, allowing them not to worry about GPU drivers and compatibility. It is a very good thing that anyone can participate in fair competition as long as they have a CPU."

Ultimately, due to the first significant rise in Bitcoin prices, which surged from $0.008 to $0.08 within five days, coupled with the rapid expansion of the Bitcoin mining community, miners began to seek ways to improve computing power, and hardware upgrades became urgent.

In May 2010, mining equipment assembled from one or more high-end GPU graphics cards made its debut in the history of mining.

Mining equipment assembled from GPU graphics cards

Ignoring specific hardware specifications, GPUs could provide hashing output speeds 100 times faster than CPUs. However, to improve mining efficiency, many people combined multiple GPUs in the same machine, maximizing output while fully utilizing existing hardware.

The programmer Laszlo Hanyecz, who famously bought two pizzas for 10,000 bitcoins, was the first person in the world to use GPU mining, just a month after he bought the pizzas.

Due to other unavoidable economic incentives, such as the gradual discovery of Bitcoin's value in gambling, drugs, and adult content, it even became a standard payment method for adult websites. Satoshi Nakamoto had successfully predicted this in an email: "Bitcoin can initially be used in some small areas, such as… micro-payments for adult websites."

The Bitcoin economy flourished, leading to a sharp increase in demand for high-end graphics cards, and optimizing GPU mining software became increasingly valuable. To promote industry progress, Bitcoin evangelists launched open-source software, with one of Bitcoin's core developers, Jeff Garzik, paying 10,000 BTC (about $600 at the time) to support it.

New profit opportunities were laid bare before developers.

On one hand, as early beneficiaries of Bitcoin, miners with limited computing power were nearly left behind during the dividend period of rising network computing levels and a sharp increase in the number of miners—individual devices or small amounts of computing power could not earn block rewards on the Bitcoin network.

This was mainly due to Bitcoin's POW consensus mechanism. As the total network computing power increased exponentially, the proportion of individual computing power decreased, leading to a diminishing probability of obtaining accounting rights and mining success.

Once the total network computing power reached a certain level, in pursuit of more sustainable and stable profits, geeks on "Bitcointalk" developed a method to pool small amounts of computing power together, establishing websites called "mining pools," where participants received rewards based on their contribution, and the pool charged a fee.

In late 2010, Marek Palatinus created the world's first mining pool, "Slushpool." On December 16 of the same year, this pool produced the first block, forever changing the structure of the Bitcoin network, as computing power began to concentrate.

Almost simultaneously, Bitcoin's price reached $0.23, successfully attracting attention from outsiders. Agora was one of the early economists to question Bitcoin's value, publishing an article titled "Why Bitcoin Can't Become Currency?" which sparked the public's first open discussion on the essence of Bitcoin's value.

On the other hand, the scattered GPU assembly could not meet the mining needs of miners, and computer equipment had reached its application limit. There was an increasing demand in the market, especially abroad, for "custom devices" specifically designed for mining.

At this time, a Chinese individual stepped forward, known later in the community as "Pumpkin Zhang"—Zhang Nangen.

In mid-2011, Zhang Nangen founded FPGA (Field Programmable Gate Array) Bitcoin mining hardware, marking the first professional chip design for mining. To this day, many FPGA mining machines are still circulating in the market.

Subsequently, with more and more mining machines joining the fray, the total network computing power soared from 120MH/S at the beginning of 2011 to 5GH/S by May 2012, signifying that the history of Bitcoin mining had transitioned from personal PC mining to an era dominated by large mining operators, ushering in a new mining era driven by mining machines and profits.

At the same time, the increasing computing power also saw a rise in the number of articles questioning Bitcoin's value. According to statistics from Block Rhythm, in 2011 alone, there were six articles declaring Bitcoin dead, including a brief commentary from the mainstream media Forbes magazine.

4. Mining Machine Mining

In 2011, Bitcoin was still viewed as a burgeoning technology in the Western world, and a few Chinese individuals began to break free from cognitive limitations, gradually recognizing Bitcoin's value and becoming increasingly active in international forums discussing Bitcoin technology and ideology.

28-year-old Zhang Nangen was one of them. Using the forum username "ngzhang," he became known as "Pumpkin Zhang." At that time, he was studying integrated circuit design as a graduate student at Beihang University. Realizing the Western world's desire for professional mining machines, Zhang Nangen used his spare time to develop FPGA machines for mining Bitcoin, which he then sold abroad, earning over 100,000 RMB in just one year. The name "Pumpkin Zhang" began to gain recognition in the mining machine market.

Zhang Nangen

In June 2012, an American organization called "Butterfly Labs," which developed Bitcoin mining machines, announced that they were preparing to develop a mining machine far superior to current ASIC machines, but it would exist in the form of futures and promised to start shipping in March 2013 while accepting pre-orders. In just a few months, official data showed that the total number of pre-orders reached 60,000 units. Discussions about ASIC mining began to ferment.

However, a few months later, Butterfly Labs failed to fulfill its promises, and it wasn't until July 2013 that they began small-scale shipments, continuing until January 2014 to complete all orders, leading to a massive wave of returns. The negative effects of futures mining machines continue to impact the industry to this day.

Zhang Nangen sensed danger at the outset of this news: if successful, Butterfly Labs would control over 51% of the computing power in the Bitcoin world, which meant they could alter Bitcoin's blocks, nearly possessing complete control. Thus, Zhang Nangen decided to develop ASIC mining machines himself and sell them to other users to counter potential monopolies.

In a later interview with GQ, Zhang Nangen explained that his motivation was purely to "maintain world peace."

On January 31, 2013, Zhang Nangen sent the successfully developed mining machine to Jeff Gazik, a core Bitcoin developer in the U.S., and live-streamed the entire unboxing process. This was the first ASIC machine, which Zhang Nangen named "Avalon," after the "Isle of Avalon" in the legend of King Arthur.

In late May of the same year, CCTV aired news about Bitcoin for the first time, attracting countless investors. As domestic understanding of Bitcoin deepened, in October of the same year, Baidu Accelerator announced it would accept Bitcoin payments; a real estate project in Shanghai began accepting Bitcoin for property transactions; and the "Chinese aunties," symbolizing economic enthusiasm, also began to participate.

At the same time, Zhang Nangen established Canaan Creative, focusing on producing Bitcoin mining machine chips, successfully developing and mass-producing series of chips such as 110nm, 55nm, and 28nm. This move also spawned a batch of mining machine manufacturers using Avalon chips, with notable ones including ASICME, Yuban, MQH, and 42BTC. Subsequently, Canaan Creative began to pivot towards becoming a supplier of AI chips for smart homes, assisted driving, and image recognition.

Data shows that by April 2017, Canaan Creative had sold approximately 160,000 Avalon series mining machines, capturing 22% of the global Bitcoin computing power market, with operating revenue of about 1.3 billion RMB, a year-on-year increase of over four times. In May 2018, Canaan Creative submitted its prospectus to the Hong Kong Stock Exchange.

Only seven years had passed since Zhang Nangen, who was once oblivious to the world in his ivory tower, watched over 500 anime a year.

Zhang Nangen's successful example inspired many in China to start trying their hand at mining. Beginning in July 2013, mining machines entered a phase of a hundred schools of thought contending, with various companies announcing research and development, pre-sales, or offering spot sales.

According to incomplete statistics from Chain Catcher, during this period, mining machine manufacturers included: Pigeon Mining Machine, TMR Mining Machine, Bit'er Mining Machine, Rand Mining Machine, Little Bee Mining Machine, Long Mining Machine, Garden Mining Machine, Kener Mining Machine, Zeus Mining Machine, and Western Mining Machine, among others.

In the following five months, the average growth in computing power reached over 30%, and the arms race for computing power centered on technology entered a heated stage, marking the beginning of China's dominance in the global Bitcoin mining industry.

However, in terms of market acceptance, compared to Zhang Nangen, most chip mining machine manufacturers found themselves in a difficult position. The only competitor was another genius youth—Friedcat.

Friedcat

Like Pumpkin Zhang, the name "Friedcat" is a direct translation of his nickname "Friedcat" on "Bitcointalk." Friedcat, whose real name is Jiang Xinyu, entered the Youth Class of the University of Science and Technology of China at the age of 15 with the 11th highest score in the nation. While many doubted his high scores and low abilities, Friedcat soared into a visiting scholar position at Yale, pursuing a Ph.D. in computer systems.

Although Friedcat was a bona fide academic achiever in the traditional sense, friends described him as always yearning for freedom, which explains why, while visiting Yale in 2011, he was completely captivated by Bitcoin's ideals of freedom upon encountering it and immediately devoted himself to researching Bitcoin mining machines.

Similarly influenced by the butterfly effect of Butterfly Labs, in July 2012, Friedcat announced on Bitcointalk that he had manufactured ASIC mining machines but was unable to achieve mass production due to funding difficulties. He sought to raise 1 million RMB through crowdfunding. The post immediately attracted many miners' attention, and he quickly raised enough funds to begin mass production.

At the same time, Friedcat registered a company in Shenzhen called Bitfountain, dividing the company's shares into 400,000 shares, of which he held 59%, with shareholders holding the rest. In April 2013, after Friedcat's main competitor Avalon officially announced it would focus on chip development and only sell a small number of complete mining machines, the entire mining machine market became Friedcat's domain.

In July of the same year, a share of virtual equity in Friedcat's mining machine company rose from an initial 0.1 bitcoin to 5 bitcoins, and combined with Bitcoin's own price increase, the returns for Friedcat's initial shareholders reached thousands of times.

In no time, the cryptocurrency community elevated Friedcat to a pedestal, with even Li Xiaolai stating, "No other chip manufacturers and managers have Friedcat's brain."

However, the astute Friedcat, well aware of the cryptocurrency market's ups and downs, remained unfazed by the spotlight on him. Even when the company's stock price rose to 5 bitcoins per share, he regarded it merely as a bubble price.

More importantly, Friedcat sensed that, although he did not know how, his company would face a crisis in the future, with the changing external environment laying the groundwork for this crisis.

On December 2013, the People's Bank of China, in conjunction with the Ministry of Industry and Information Technology and other ministries, issued a notice guiding the "orderly exit" of virtual currency mining operations in China, although it was later reported that the government did not plan to ban mining. Nevertheless, the wave of mining operations exiting China began, especially among the top-ranking mining operations.

Earlier this year, Wu Jihan, who operated the two largest Bitcoin mining operations in China, stated in an interview that the company was establishing a regional headquarters in Singapore and expanding mining operations in the U.S. and Canada.

According to the founders of each company, the third-largest mining operation, Liebit (BTC.Top), is opening a branch in Canada, while the fourth-largest, ViaBTC, has established operations in Iceland and the U.S.

It can be imagined that after the domestic policy turmoil, the future choice of mining operations will prioritize balancing cheap electricity and climate conditions, with policy security being a key consideration.

Over the course of a decade, under the influence of external factors such as electricity, climate, and policy, every step in the mining industry has proven to be particularly arduous, akin to the Age of Discovery during Columbus's time, where participants set sail with ambitious dreams but found themselves adrift in an unknown sea, hesitating: should they continue searching for the ideal continent, or safely return to the starting port?

In response to this question, Wu Jihan once said: "In the face of a new continent, those in the community who dare to try to travel the world with Bitcoin are those who want to settle in the new continent; the vast majority of investors who buy high and sell low, hoping to improve their lives, will likely return to the starting port; as for myself, I am interested in the journey itself, where to settle will be discussed later."