Written by Tynan Overstreet
In this Mining Bytes we introduce, analyze and instantiate a new primitive in cryptocurrency, named Clean Mining, which provides efficient means of acquiring cryptocurrencies at scale while providing the added benefit of stabilizing prices through financial quantitative strategies and other financial investment techniques. Clean Mining is defined as the implementation of quantitative and systematic trading strategies to accumulate additional cryptocurrency.
Case Study: Mining Without Hardware
We mined over 316 Ether from 7/28/2018 to 9/12/2018 with commodity CPU’s and specialized software. No GPU’s or ASIC’s were employed over the time period. In total, the variable costs required to accomplish this cost $330 / month to operate and were mainly related to renting servers. In order to engage in said mining, we maintained an inventory of coins and fiat currency with a starting mark-to-market value of approximately $236,000 USD.
Two questions naturally arise:
• How does one mine coins without GPU’s or ASIC’s?
• How many GPU’s would we have needed to mine the same amount of coins in that time period?
Clean Mining vs. PoW Mining
Traditionally, investors wishing to earn a stream of tokens have resorted to Hardware Mining: the use of computer hardware (ASICs and GPUs) to generate new tokens over time. As an alternative, this paper presents a technique we call Clean Mining. Clean Mining is the implementation of quantitative and systematic trading strategies to accumulate additional tokens.
Clean Mining has the dual mandate of:
- Maximize number of coins in inventory
- Minimize fiat price risk
In contrast to Hardware Mining, which begins with an investment of capital in mining hardware, Clean Mining starts by investing in the digital assets we wish to acquire. Afterwards, we use the token inventory itself to generate new tokens via trading strategies which access crypto liquidity via exchanges (both centralized, e.g. Coinbase, and decentralized, e.g. the EOS RAM market).
In this way, Clean Mining retains the benefit of mining to the investor — a stream of new tokens — while also seeking to remove the need for a large upfront investment in mining hardware. As a result of removing the need for specialized mining hardware, Clean Mining significantly lowers the day-to-day variable costs of operation (e.g. power). There are positive externalities for the system as a whole as well, as many clean mining strategies provide additional liquidity to the market. The technological demands of clean mining are hence shifted from hardware to software.
Since Clean Mining programs can run on commodity hardware, the capital required to mine a given amount of tokens is significantly reduced. Additionally, high variable costs associated with POW mining, like power and hardware replacement, are reduced by orders of magnitude in Clean Mining.
Efficient Cost Structure
To get a better feel for the efficiency of Clean Mining, let’s calculate how many GPU’s we would have needed to mine the same amount of Ether using traditional hardware-based mining methods. Assuming a 33 mh/s hashrate per GPU, that implies 0.002426 Ether per day per GPU. There are around 50 days in the time period in question, so a single GPU would generate 0.1213 Ether. This implies that we would have needed around 2,605 GPU’s running around the clock to mine 316 Ether in the same amount of time. Assuming $600 per GPU, this would have required an investment of around $1.5 million, roughly five times more capital than we actually employed in our clean mining operation. In contrast, our Clean Mining “rig” was much smaller, consisting of 4 cloud-hosted servers: 2 servers specifically for hosting mining strategies and 2 full EOS nodes.
In addition, operating 2605 GPUs would create a significant power bill. Depending on location, these power costs could easily consume the majority (or more) of mining revenue. Given today’s depressed market prices, there is evidence that Hardware Miners are getting into trouble:
MGT Capital Investments Inc., for example, owned or operated 6,800 Bitmain Antminer S9 rigs at the end of June. The North Carolina company, which was once planning to change its name to John McAfee Global Technologies Inc., posted a $6.5 million loss for the June quarter on revenue of a mere $409,000.
In our viewpoint, the traditional mining space is overcrowded and will be subject to diminished returns at an accelerated rate. Moreover, the push within the industry toward Proof of Stake (PoS) cryptonetworks may render hardware investments completely worthless in the long run. Thus we made the strategic decision to find an alternative way to acquire cryptocurrency and generate a steady stream of new tokens via Clean Mining.
In order to get a better understanding of the mechanics involved in Clean Mining, let’s dissect some simple examples which generate new tokens. At minimum, Clean Mining requires a trading pair, such as ETH/USD or EOS/ETH, and an existing investment in one or more of the legs of each pair. More complicated strategies can employ more than two (2) currencies.
To begin, the following trade will use USD to mine ETH via the ETH/USD trading pair:
• T = 0 start with $5,000
• T = 1 buy 250 ETH @ $200 for $5,000
• T = 2 sell 200 ETH @ $250 for $5,000
• T = 3 have $5,000 and +50 ETH
There is no requirement that one leg be a fiat currency. The next example is crypto to crypto:
• T = 0 start with 10,000 EOS
• T = 1 sell 5,000 EOS for 112.5 ETH @ 0.0225 EOS/ETH
• T = 2 buy back 5113.62 EOS using 112.5 ETH @ 0.0022 EOS/ETH
• T = 3 have 10,113.62 EOS (+113.62 EOS)
More sophisticated strategies might include 3 or more legs, as in this case using US Dollars and Ether to mine EOS
• T = 0 start with $65,000 US Dollars
• T = 1 initiate the mining spread:
– purchase 10,000 EOS @ $5 EOS/USD
– borrow 250 ETH and sell it short for $200 ETH/USD using $15,000 USD as collateral
• T = 2 unwind the hedge leg of the spread:
– Buy back 250 ETH at $150 ETH/USD, leaving residual of $12,500 USD
• T = 3 swap the USD residual, $12,500, for EOS at $4.75 EOS/USD, and mine some EOS (+2,631.578 EOS over the 10,000 initially purchased)
The kernel of any Clean Mining program is a trading strategy which opportunistically exchanges one token for another (or fiat currency). Each kernel must have a positive expected value; it must generate positive trading profits over time or else mining residuals will be predominantly negative. Familiar strategies such as statistical arbitrage (pairs trading), market making, and momentum (swing trading) are just three possible candidates for kernels. To reiterate, the only requirement for a successful kernel is that it has a positive expectation of mining residuals and an acceptable return on the capital invested.
An Expanded Definition of Mining
In expanding the definition of cryptocurrency mining, Clean Mining offers an attractive alternative for investors to acquire digital assets at an institutional scale. On a top line basis, as in not including costs, we have found that dollar for dollar Clean Mining is 5x as efficient as traditional GPU mining for Ether. Additionally, the costs of running a clean mining operation are orders of magnitude less than Hardware Mining: we ran the equivalent of over 2600 GPU’s for $330/month. Given the mounting evidence of an investment glut in Hardware Mining, we believe that Clean Mining will produce outsized returns relative to traditional methods over the next 12-24 months, depending on how quickly the market adopts volatility-based mining techniques.