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How Peercoin Got A Boost From Bitcoin's Halving

(@JayCoDon) | Published on August 7, 2016 at 16:50 BST
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Bitcoin mining is perhaps best viewed as a speculative endeavor.

Miners take electricity and turn it into bitcoin, hoping that they can generate a profit when the cost of producing the digital currency is less than the amount spent on power. When they can't, miners have two options – they can begin mining another cryptocurrency or shut down their equipment for good.

For some miners, the recent bitcoin halving forced this very choice.

Early this summer, the amount of bitcoins the network was programmed to pay out per block was cut in half, falling from 25 to 12.5 BTC. In a matter of minutes, bitcoin mining became less profitable.

But, rather than abandon their machinery and their efforts, a notable minority elected to begin mining a cryptocurrency called peercoin.

While there were other options that could have been considered, there were some reasons for the specific choice. Launched in 2012, peercoin is among the more tenured cryptocurrencies, and it uses a similar hash function as bitcoin.

After all, for miners to liquidate the cryptocurrencies that they mine, there needs to be a market, and in order to mine those coins, their equipment needs to be compatible with the network.

Peercoin, which also uses the SHA-256 cryptographic hash function, and sees $100,000 in daily volume, fits this need.

Researcher Adam Hayes explained that the peercoin network hashrate surged from roughly 500 terahashes per second (TH/s) to 6,500 TH/s following the halving, and that this was the most notable of the increases he observed.

Hayes even went so far as to personally participate in this increase as a hobby miner looking to optimize his performance.

For a short time, Hayes said he was able to use his Antminer S9 to increase his leverage, telling CoinDesk:

"It was marginally more profitable by about 200%."

Why the boost?

The new economic edge for miners was created by peercoin’s approach to mining. Unlike bitcoin, which uses a process called proof-of-work (PoW) to secure the network, peercoin is a hybrid cryptocurrency that also utilizes proof-of-stake (PoS).

In a PoS model, those who own peercoin are the ones that verify transactions on the network. The more peercoin you hold, the more important your verification is for the network.

The argument is that this incentivizes users to save their peercoin rather than spend it.

However, there is still a network of miners whose responsibility is to create new peercoins for circulation in the network. Unlike bitcoin, which has a predictable release schedule, peercoin's is more fluid, releasing its coins at a rate that's dependent on the difficulty of the network.

This means the more difficult it is to mine, the fewer rewards offered by the network.

For example, on 18th June, peercoin's difficulty was approximately 303.49 million, which resulted in a 75.77 PPC block reward. Fast forward to 10th July, the day after halving, and the difficulty had spiked to 570 million, which cut the block reward to 64.8 PPC.

Symbiotic relationship

For a short window, it seems the economics were right to encourage a migration from bitcoin to peercoin. However, due to the network's unique rules, this benefit appears to have been short-lived.

The next day, peercoin's difficulty spiked to over 700 million, which made it less profitable than bitcoin mining.

Because of the relationship between the two networks, some miners make a routine of switching between the networks.

Kyle Sidles, a miner in Washington State, explained that his operation is set up to do just that in an attempt to maximize margins.

He told CoinDesk:

"Immediately after the halving, the profitability for mining peercoin was nearly that of bitcoin. That did not last long as many bitcoin miners noticed this and started diverting hashing power to peercoin."

According to his analysis, peercoin is only profitable if the difficulty is less than approximately 650 million. If the difficulty is higher, he explained, bitcoin is more profitable.

Peercoin's value proposition

Of course, you may be wondering what gives peercoins value at all.

For now, peercoin is a small cryptocurrency with an $8m market capitalization and a small band of loyal developers.

At its core, peercoin is meant to be a decentralized store of value currency, those involved with its development say.

Randy Vittorini, the community manager of PeercoinTalk, summed up the goal of peercoin in an email, stating:

“Peercoin was intentionally designed to fulfill the role of backbone currency, rather than transactional currency."

His argument is that the sole focus of peercoin is to stay decentralized, and that this provides protection for user wealth.

To stay decentralized, tiny transactions have to be prevented from occurring on the main peercoin blockchain. (To achieve this, the protocol charges a flat 0.01 ppc/kb fee for transactions, an amount that is deducted from supply).

Due to how expensive this is, it keeps spam from flooding the chain, thus allowing the blockchain to stay small data-wise. It's easier for a small chain to be decentralized than a large one.

The relationship lives on

While much of the newly arrived hashing power ultimately left peercoin to return to bitcoin, the relationship between the two can continue for as long as miners are trying to eek every last penny out of their hardware.

With the ease of switching between SHA-256 coins, if bitcoin mining is unprofitable, miners will switch to others.

Though, this relationship is entirely opportunistic for miners with little benefit to peercoin. With miners likely selling their peercoin immediately after they earn it, peercoin doesn't increase its security by adding new long-term holders.

Ultimately, this arguably turns into a parasitic relationship. This time, it's peercoin that saw the hash jump. Next time, it might be an entirely different altcoin.

With ASICs only able to mine one cryptogaphic hash function, any coin that utilizes SHA-256 and has enough liquidity for miners to get out could see similar spikes.

Rabbit image via Shutterstock

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