CoinSummit Day Two: Mining Superpowers and the 51% Challenge

Joon Ian Wong
Jul 11, 2014 at 20:55 UTC
Updated Jul 12, 2014 at 11:44 UTC

A significantly thinned out crowd reassembled for the second day of CoinSummit in London today.

Those who didn’t attend the Swam-sponsored afterparty the previous night – or possessed exceptional powers of post-party rejuvenation – dutifully filed into the glass-walled East Wintergarden. Several panelists informed CoinDesk, and in some cases posted on Twitter, that many libations were consumed the previous night.

Ultimately, the crowd came geared up for what promised to be another data-packed series of panel discussions.

On 51% attacks, core devs call for miner activism

Day two kicked off with a panel discussion focused on a hot topic in the bitcoin community: the threat of 51% attacks.

Titled ‘Will Bitcoin Last the Distance Beyond the 51% Challenge?’, the panel was moderated by angel investor Jez San and featured of bitcoin core developers Jeff Garzik and Peter Todd, as well as Cornell University Professor Emin Gun Sirer.

The participants agreed that, while there will be a technical fix at some point in the future that prevents 51% attacks, for the time being, the onus is on the mining community to make sure that such an event is avoided at all costs.

Todd said the mining community needs to be responsible and considerate of which pools they use in order to ensure that mining power is spread evenly across the network. He added that pool-switching should be explored by large-scale miners, if necessary.

He went on to say there need to be more developers involved with bitcoin core projects. Currently, Garzik explained, people are pitching plenty of great concepts but there isn’t enough hands-on involvement – or hours in the day – to research, develop and implement these ideas.

The conversation later turned to education and the development of a new generation of core developers. Sirer said masters classes at Cornell university now feature a lecture or two on cryptocurrencies. He doesn’t see a full course on the topic being created anytime soon, but he said that a number of students are choosing to focus their research projects on bitcoin.

A key takeaway from the panel: awareness of bitcoin in the 18-to-22-year-old crowd is ever increasing. As a result, the space should see an influx of crypto-focused graduates in the coming years ahead.

China could become a mining superpower

China is always a heated topic for bitcoin price-watchers. Several major price movements in the past year have been largely attributed to regulatory changes from the Chinese government.

A panel focusing on China’s bitcoin market included Bobby Lee, chief executive of BTC China, Rui Ma of startup seed fund 500 Startups and Jack Wang of bitcoin wallet Bifubao. The panel was moderated by Jeremy Liew of Lightspeed Venture Partners.

China

The panel had several interesting pieces of information to share. Ma discussed how China already has three well-funded bitcoin exchanges, and as a result, that part of the ecosystem has become unattractive to new entrepreneurs. Instead, exchange-focused startups are diverting their efforts to altcoin exchanges, wallets and services.

Ma also noted that the mining sector is the focus of much investment and entrepreneurial activity. She cited funding rounds for mining operations that have brought tens of millions of dollars in investment thus far.

Ma said:

“It appears there is a staggering amount of money being poured in […] I was under the impression that China had cheaper electricity but that’s not the case; it’s because of cheaper labour and real estate costs.”

Underlining the importance of mining in China, Wang remarked that some estimates suggested China-based miners could account for up to 60% of global mining power in future. Both he and and Bobby Lee struck less optimistic tones in regards to the Chinese bitcoin market.

Lee pointed out that the Chinese government had issued informal guidance to banks and payment processors that were “suffocating” exchanges, although official guidance remained relatively liberal towards bitcoin. This approach appeared to be gaining traction with other regulators around the world. This included Europe, as demonstrated by a recent report from the European Banking Authority.

Lee continued:

“[The authorities] say one thing, and they do something different by suffocating exchanges, limiting what banks and payment providers can do. This is true in Hong Kong and Singapore as well. When the doors are closed, they say, don’t you dare touch it, don’t you dare transact with bitcoin companies. It’s all hush-hush, never written down.”

Lee added that the notion that Hong Kong, a special administrative region within China, was being treated as a more liberal jurisdiction for bitcoin by the Chinese government is false.

“There is a feeling that China is going to allow Hong Kong to experiment with bitcoin. I don’t think there’s any truth to that. All the banks I talk to in Hong Kong are even more paranoid,” he said.

Wang, meanwhile, said there was a serious adoption problem among merchants in China. This is because of the impression that bitcoin is illegal. As a result, entrepreneurs can’t build a company that provides consumer-friendly end-to-end services in the mode of Coinbase or BitPay due to a lack of demand.

Wang explained:

“It was tough convincing [merchants] to take that risk, especially combined with the capacity of Chinese consumers not to spend their bitcoin. That cuts off the merchant services portion.”

Banks still wary of bitcoin companies

A group of exchange operators gave their views on the challenges facing their corner of the bitcoin economy.

The panel included Rich Teo, the outgoing CEO of Singapore and New York-based exchange ItBit; Jesse Powell of Kraken, the largest exchange by volume for the euro-bitcoin trading pair, according to CoinSummit organiser Pamir Gelenbe; and Jeffrey Smith of CEX.io, the exchange arm of mining pool Ghash.io. Luke Sully of PwC’s fraud unit moderated.

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The discussion focused primarily on transparency and compliance. Powell noted that his firm spends heavily on legal work to ensure legal compliance in US, even though the nature of future regulations regarding digital currency remains vague. This, he said, puts the company at a disadvantage compared to other exchanges that operate in the US without the same outlay on legal affairs. Powell also remarked that he sees more liquidity entering the bitcoin market from a variety of institutional sources, saying:

“The single biggest challenge for any exchange is liquidity, and liquidity begets more liquidity. I see more liquidity coming in through institutional money, through Wall Street, hedge funds, prop trading shops, family offices.”

Banks also continue to be the bane of exchange’s operations, the panel agreed. The operators concurred that the process of gaining a banking relationship remains difficult and opaque. Powell summed it up:

“You could spend a hundred hours with a bank and get the completely on board. Then for whatever reason, they pull out at the last minute. They decide it’s too risky for them […] They’re more worried about what other banks think. Banks rely on other banks; it’s a network. And that’s something we can’t really do anything about.”

Operators were unanimous on the topic of consolidation in their sector. But it won’t happen any time soon, they said.

Should we call it mining?

A panel on the future of bitcoin mining brought together Marc Aafjes, who runs strategy and communications for BitFury; Dave Carlson, MegaBigPower’s founder; Timo Hanke, chief technology officer at CoinTerra and Naveed Sherwani, chief executive of PeerNova. It was moderated by Jez San.

Miners

The issue of semantics – and whether or not the term ‘mining’ is accurate – came up repeatedly during the discussion. Sherwani raised the point that describing the industry with that language wasn’t an accurate, saying

“Mining gives a very different kind of mental image of what we do. We are not mining, we are processing transactions and adding blocks to the blockchain.”

Scalability and the shape of future investment in the mining space was also touched upon. As miners have to invest significant capital in order to run a competitive mine capable of discovering blocks, the issue raised was this: how much capital outlay will be the right amount? Carlson thought he had the answer:

“In the next two years 2.6 million bitcoins will be produced. At current prices that’s a $2 billion market opportunity. How much does it cost to invest, to capture a large market share of that $2 billion? It’s far less than $2 billion. You could invest $100 million and capture a significant share.”

Petahash predictions

With the network running at roughly 140 petahashes per second, moderator Jez asked the mining panel how much hashing power they foresee by year’s end. Here’s what they had to say:

Timo Hanke: 600 PH/s.

Naveen Sherwani: 350-400 PH/s.

Dave Carlson: 350-400 PH/s.

Marc Aafjes: More than 600 PH/s.

And with those predictions posted, the curtains were brought down on another CoinSummit in London. Suitcases with wheels were produced and speakers and delegates prepared for the next cryptocurrency confab on their agenda.

Emily Spaven contributed reporting.