The recent drop in values has created anxiety among many players in the crypto space, perhaps none more so than miners, many of whom have begun to experience losses for the first time. Mining is the underlying foundation for proof-of-work (PoW) cryptos, as it ensures decentralization and maintains consensus. Thus, the lack of profitability over time could spell disaster for many platforms.
Over the course of this year profit margins for miners have shrunk substantially, as crypto values have declined, hash difficulties have increased, and mining equipment has become more expensive. In fact, Bitcoin and several other PoW platforms are now largely dominated by industrial level mining farms, as small-scale miners are unable to mine profitably. This latest drop in coin values, which has seen Bitcoin fall below $6,000, has now even put many industrial miners into the red, and may lead to a major transformation of the entire crypto space.
One serious consequence of the present phenomenon is that it is leading to fewer miners, and a greater concentration of mining among the largest operations. This scenario threatens to undermine decentralization, and make platforms more vulnerable to 51% attacks. Notably, Bitcoin mining is already concentrated in a handful of very large pools (notably Bitmain’s Antpool), which many advocates consider a serious concern. The current situation only makes this problem worse.
Mining issues could also lead to a greater adoption of proof-of-stake (PoS) cryptos, or other platforms that use alternate consensus mechanisms. The long-term sustainability of proof-of-work is already heavily debated, and no significant PoW cryptocurrency has been created in almost three years. Given the fact that miners are among the most active participants in the crypto space, and have a substantial impact on development and publicity, they have the ability to shift public opinion on the best coin architecture.
It is worth noting that mining difficulty has decreased along with profitability, which will help miners make up for the decline in values as their rigs will generate more coins. Notably, Bitcoin difficulty has declined for almost six weeks, which is a first for the flagship cryptocurrency. Much of this drop is no doubt due to inefficient, unprofitable miners turning off their equipment, and is also reflected by the fact that there are nine hundred fewer nodes operating than at this time last year.
Ironically, the decrease in mining profitability could contribute to a rebound in crypto prices. Former miners are likely to begin buying crypto on exchanges, which will could increase demand. Additionally, remaining miners will need to sell less to cover their fiat expenses, such as electricity, which will reduce supply.
Blockchain technology is designed to automatically adjust to changing circumstances, and self-correct problems in a decentralized manner. There is little doubt that Bitcoin and other PoW platforms will return to profitability as difficulties decrease. However, public trust, and demand must also be secured, which can be challenging in periods of volatility. The current scenario thus represents the fact that the crypto space remains in a period of development, and the final picture for mainstream use of blockchain platforms is far from complete.
Featured Image via BigStock.