Author: Eric Voskuil 2019-10-21 03:34:12
Published on: 2019-10-21T03:34:12+00:00
The discussion between Lucas and Eric revolves around the profitability of Bitcoin mining. Lucas suggests that miners can protect themselves from losses due to increasing hash rate by purchasing hash-price insurance contracts. However, Eric questions the assumption behind this problem statement, as hash rate increase does not necessarily imply unprofitability. Lucas argues that the main uncertainty a miner tries to protect against is not the inefficiency of new equipment but how much new mining equipment is being deployed worldwide. He also clarifies that there are two different metrics for "profitable," namely operational profitability and ROI, which are often confused. The instrument he proposes protects against the scenario where P > 0, but ROI >>.The proposed idea is for a hash-price insurance or option for Bitcoin mining operations. There are three conditions for paying out: after the expiry date, both miner and insurer can agree to spend at any time, or before expiry the miner can spend by providing a pre-image that produces a hash within certain difficulty constraints. If hashing becomes cheap enough, it becomes profitable to spend resources finding a suitable pre-image, rather than mining Bitcoin. Both parties can reach an agreement that doesn't require actually spending these resources.If the price doesn't go down enough, the miner just mines Bitcoin, and the insurer gets their deposit back. The instrument is for guaranteeing a minimum profitability of the mining operation. However, implementation issues arise due to the inability to do arithmetic comparison with long integers >32bit in the script, so a hacky solution may be needed. The pre-images are chosen by the insurer, and a "honesty" deposit or other mechanism may be needed to punish the insurer if they choose a hash that doesn't correspond to any short-length pre-image. New opcodes may also be necessary.The discussion sheds light on the factors that affect Bitcoin mining profitability and the potential use of hash-price insurance contracts to mitigate risks. Eric responds that insuring investment is a zero-sum game, and the disproportionate increase in hash rate is based on the expectation of higher future return. They also discuss the analogy of car insurance. Lucas is more interested in the technical feasibility of the contract than its economic practicality in the present.The proposal was discussed on the bitcoin-dev mailing list.
Updated on: 2023-06-13T21:59:37.349323+00:00