Author: Parker Merritt, Kyle Waters
Original compilation: 0x11, Foresight News
In this special edition of The State of the Network, we take a data-driven look at the Bitcoin mining ecosystem in Q4 2022.
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Source: Coin Metrics Network Data Pro
There may be an interesting explanation behind the rise in hash rate in late September and October: Ethereum mergers. As an independent cryptographic researcherData Alwaysimage description
Source: Data Always
However, the spot bitcoin price faced renewed downward pressure following the collapse of FTX, and the hash rate began to decline. Bitcoin’s mining difficulty (a network parameter that automatically adjusts every two weeks to control block times) has recentlydown by more than 7%, which is the biggest drop since the spring of 2021, when miners retreated from China.
The stagnation in the hash rate suggests that miners are facing renewed challenges in a cautious market environment.
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Source: Coin Metrics ATLAS & Reference Rates
One metric we can use to monitor mining activity is the number of addresses receiving bitcoins directly from the mining pool. These addresses are usually controlled by individual miners who contribute computing power to the mining pool of their choice. The number of active miner addresses tends to reach a high point after the Bitcoin price peaks, and as speculative enthusiasm wanes, miners begin to slow down hardware deployment. Five months after Bitcoin's price peaked in December 2017, monthly active miner addresses hit 80,000 before falling to lows near 10,000 in 2020.
We haven’t seen nearly the same level of mining frenzy reflected in active addresses during this bull cycle, likely due to the consolidation of hash power into a smaller set of publicly traded entities. However, in 2022 we still see the number of active mining addresses drop by more than 50% from recent highs to the lowest level since 2011. Miner active addresses appear to have bottomed out in August, rebounded weakly over the past few months, and are likely to decline in December as major miners file for bankruptcy one after another.
Although the bitcoin mining industry has matured over the past few years, the trend of periodic capitulation suggests that the industry still has some progress towards proper risk management. While power purchase agreements allow miners to control the risk of rising energy prices, options for managing hash price risk (a measure of dollar-denominated revenue per unit of hash rate) are few. To this end, mining service providers like Luxor Technologies have developed derivative products for more complex operations, allowing miners tonon-deliverable forwardimage description
Source: Luxor Technologies
In the example scenario above, miners can use Luxor's NDF contract to hedge the risk of falling hash prices. Normally, a drop in hash price would only result in lost revenue; however, if miners were selling 1,500 NDF contracts at $90 per PH/s/day, they would effectively be locking revenue at a threshold. Thirty days later, the miner settled the contract at a hash price of $70 per PH/s/day, making a net profit of $30,000, offsetting the decline in mining revenue.
While Luxor’s hash price market is still in its early stages, hash rate derivatives will undoubtedly play an increasingly important role in managing miners’ risk, especially as the industry continues to attract more capital from traditional industries.
Foundry beats the competition
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Source: Coin Metrics ATLAS
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Source: Coin Metrics ATLAS
Foundry's absence of empty blocks is a testament to the pool's block templating capabilities. Within seconds of a block being mined, mining pools scramble to assemble a new block template, choosing the transactions with the highest fees to include in their next attempt to solve the proof-of-work. During this time, the mining pool continues to throw out hashrate, which means that there is little chance that a block will be mined before the transaction bearer template is fully assembled.
Until 2022, Foundry has built block templates fast enough. However, withStratum V2With an upcoming release, individual miners will soon have the option to assemble their own templates, cutting pool middlemen out of the transaction selection process. Whether this will affect the empty block rate, and how this will affect the mining pool landscape, remains to be seen.
Waves in Mempool
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Source: Coin Metrics FARUM
Of course, a Bitcoin bear market wouldn’t happen without some vicious community infighting over seemingly trivial technical details. Casual Bitcoin users may not have even heard of itReplace-by-Fee(RBF), a special transaction type that allows users to choose to rebroadcast previous on-chain transactions at a slightly higher fee.
RBF is designed to help relieve mempool pressure during periods of congestion, allowing users to promote transactions into the priority queue by tipping miners higher. However, members of the bitcoin merchant community warned that the feature could be easily abused, and that users could also "reverse" zero-confirmation transactions by rebroadcasting the payment and replacing their own address with the recipient. For merchants who unsuspectingly accept malicious zero-confirmation transactions, this effectively amounts to double spending, increasing the risk of chargeback fraud.
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Source: txstats.coinmetrics.io
Regardless, miners have little direct incentive to worry about potential RBF fraud. Higher fees will only increase the profits of miners, no matter where they come from. Still, the increased complexity of monitoring RBF transactions could also make block templating more difficult, forcing miners to pay more attention to mempool dynamics than ever before.
Will the future get better?
Miners have had a tough year, especially in the fourth quarter. Looking ahead to 2023, there are many unanswered questions besides Bitcoin price that will determine the direction of the Bitcoin mining industry.
As the mining industry expands in the U.S. market, different jurisdictions are analyzing the mining industry differently. In November, New York was the first to enact a two-year moratorium on new mining operations in the state. Meanwhile, as Texas prepares for winter, the state's Energy Reliability Council recently reported a large flexible load worth 1.7 GW, mostly composed of bitcoin miners, to help the national grid operator manage high demand for electricity period. Interactions between miners and governments at the local, state, and possibly federal levels will likely continue to increase through 2023.
On the operational side, miners may need to continue to monitor input costs in the face of higher industrial electricity prices. Large operators who are in a good position to optimize each variable can be expected to succeed in this environment. Further maturation of the mining industry and technological upgrades in the next year may benefit the ecosystem, such as the upcoming Stratum V2.
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