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There's thousands of transactions nearly every block.
That's true. I guess what I meant is that despite this, there is no demand driving fees above nearly rock bottom.
Mining cannot be "profitable" over a long time horizon, it's not meant to be. Market dynamics mean profit will always be arbitraged out. Break-even mining, waste-heat generation (space heaters etc), ideological mining, altruism, or as a institutional security COST are keys to decentralization.
These are exactly the kinds of ideas I was looking for with my post Thank you! I was trying to think of scenarios where mining is not profitable.
For-profit mining is an anomalous condition created not only by the subsidy, but real world transient activity like arbitrage on stranded energy (nat gas wells) and reduced data center footprints for legacy compute (AI is finally squeezing this out), the treasury company fad (publicly traded miners), and demand by institutions for provenance coins (new coin base coins without a chainalysis history that institutional lawyers see as a liability)
Interesting idea that it was never meant to be profitable. I mean in most industries, profit gets arbitraged down, but not out completely because otherwise people would stop. What makes mining materially different in this sense? Exactly those things such as altruistic mining, waste-heat, etc?
Bitcoin the industry is different than Bitcoin the network or Bitcoin the money
Since blocks are not a product or service, there's no sales pipeline, nor a moat a producer has to protect margin. It's completely arbitrage-based.
Given the perfect arbitrage for lack of moat or sales pipeline, the non-monetary reasons to mine drive that arb negative. Altruism, waste heat, ideology, provenance premium all add competition to production costs.
That's not to say miners will always operate at a loss, just the reward will have to come from somewhere other than arb we associate with mining today. The industry must and will change.
Focusing on industrial scale and not just plebs running space heaters, the best example is provenance coins being worth more than "used" coins to institutions. If it cost 100k to mine 95k worth of coin, but an institution will pay 105k for the provenance coin, the miner is still up 5k/coin despite mining at a loss.
If a greenhouse spends 100k to mine 95k worth of coin, but saves 10k on their heating bill, they're still up 5k/coin despite mining at a loss.
We can then scale these principles to the pleb with space/water heaters, or to national banks of sovereign countries that don't want foreign countries in complete control of the ledger they use for the world reserve currency. They may mine at substantial loss simply to protect their holdings because they assign it an insurance value beyond the mine value of the coin.
I think it's healthy that fees are at the lower bound, I want to see less industrial mining, more decentralized mining... if fee's were higher it'd favor at-scale mining who can better arbitrage it.
I always think what if blocks become so full fees make mining a really lucrative business. Plus a million sats in today’s purchasing power can be vastly different 50 to 60 years from now.
If this protocol is going to become the world’s financial operating system I think your opinion on mining not being profitable is a bit bearish on the economics of the entire protocol
There's no economic rationale for it to be profitable over the long term, since there's no moat to prevent competition and the resultant race to the bottom.
If fee rates spiked, that would just bring more miners online, thereby increasing overall hash rate and driving the cost of mining higher until it's unprofitable.
It's all just math, there no branding or sales channels, no regulatory capture. Anyone can arb out the premium.
Access to ASICS and energy have been the source of any margin, but mentioned AI has squeezed the energy/footprint arbs, and ASICS have become increasingly commoditized over time... especially with AI also increasing the number of fabs.
The waste-heat/ideological/security dividends take otherwise an perfect break-even arb opportunity and drive it negative.
Thinking mining has to be profitable is bearish, that assumes Bitcoin only exists as an arb play, repackaging capex and marking it up to gain fiat. My outlying takes are because i'm unequalled in bullishness.
If fee rates spiked, that would just bring more miners online, thereby increasing overall hash rate and driving the cost of mining higher until it's unprofitable.
The capex time drag to deploy this at scale has an upper bound. Only so many ASICS and rack space exist. If fees jump to 20BTC per block today how long will it take arb out the profit margin? a week? a month? A year?
Access to ASICS and energy have been the source of any margin, but mentioned AI has squeezed the energy/footprint arbs, and ASICS have become increasingly commoditized over time... especially with AI also increasing the number of fabs.This is because all the margin is attributed to the block reward. If the subsidy drops to 10 million sats today so many institutional miners will go bust due to their reliance on that subsidy to pay op ex. We only have a week of data when fees were well above the subsidy.
Yeah the AI boom has already impacted the supply for ASICS until that market.
Thinking mining has to be profitable is bearish, that assumes Bitcoin only exists as an arb play, repackaging capex and marking it up to gain fiat. My outlying takes are because i'm unequalled in bullishness.
On a fiat standard sure but is it crazy to think electricity priced in sats (that should go down per kilowatt/hr) can’t make mining purely profitable from a sat flow perspective?
Maybe I am naive or bias but I think mining could end up being a lucrative business.
Only so many ASICS and rack space exist
That just adds to costs, profitability would go somewhere other than mining, like to the datacenter owners that service the increased demand or hold co's that lease out mining equipment
If the subsidy drops to 10 million sats today so many institutional miners will go bust due to their reliance on that subsidy to pay op ex.
Yes and that would be a good thing, when they ultimately have to liquidate their equipment it decentralizes it closer to people who'd do it for other reasons rather than pure arbitrage
On a fiat standard sure but is it crazy to think electricity priced in sats (that should go down per kilowatt/hr) can’t make mining purely profitable from a sat flow perspective?
Same economics apply, whatever the profitability is denominated in gets arbed.
I think mining could end up being a lucrative business
Picks and shovels, the purely arb-based system institutional mining is based on is unsustainable over time. I think AI is already showing some ways its more adjacent to other businesses like storage and datacenters, but those also highlight how it can be unprofitable in and of itself while offsetting other costs that incentivizes operation.
Waste heat as offsetting heating cost is just one example of how mining at a loss can still be better than not mining at all. Datacenters and energy producers may use it to offset under-load during off-peak times.
The waste-heat/ideological/security dividends take otherwise an perfect break-even arb opportunity and drive it negative.
This changes what it means for mining to be profitable. It'll be a profitable way for people to produce heat, unless the ideological element is a lot stronger than I anticipate.
I wouldn't call a few million, or even a few hundred K sats, nearly-0. That's still rather material in future epochs considering fee rates are already at the lower bound.
There's thousands of transactions nearly every block.
Second layer creates more chain transactions, not less, that's the jevon's effect. Lightning node runners invoke the chain more than they ever would have in its absence: #1437045
Lightning nodes are micro-institutions on a multi-institutional ledger.
Mining cannot be "profitable" over a long time horizon, it's not meant to be. Market dynamics mean profit will always be arbitraged out. Break-even mining, waste-heat generation (space heaters etc), ideological mining, altruism, or as a institutional security COST are keys to decentralization.
For-profit mining is an anomalous condition created not only by the subsidy, but real world transient activity like arbitrage on stranded energy (nat gas wells) and reduced data center footprints for legacy compute (AI is finally squeezing this out), the treasury company fad (publicly traded miners), and demand by institutions for provenance coins (new coin base coins without a chainalysis history that institutional lawyers see as a liability)
That'd render Bitcoin worthless as it undermines it's core premise of infinity / 21M... won't happen.
It's important to think of the chain as institutional technology, institutions have barely arrived. It's not for coffees, unlocking paywalled videos, or payments between APIs. It's for settlement akin to ACH/Wire transfers.
Replacing ACH/Wire transfers alone would exceed its throughput potential, but supply is the more material constraint. There's literally not enough coin to distribute, so a few hundred million institutions at best will have access to the chain.