The Bitcoin gold rush reminds us that infrastructure matters

In November, 2013, Forbes’ Warren Meyer posted an article titled “Moore’s Law on Steroids: World Computing Power for One Type of Calculation is Doubling Every Three Weeks”. The type of workload he had written about is Bitcoin mining. Bitcoin is today’s most popular virtual currency. The rather astonishing growth in Bitcoin mining coincides with a boom in the currency’s price. In November along, the value exploded from about US$200 to over US$1000. While virtual currencies are still in the earliest stages of adoption, interest and adoption has ramped up recently. Earlier this month, a California Lamborghini dealership accepted virtual currency for the first time. A buyer paid 91.4 Bitcoins, equivalent to US$103,000 at the time.

Compare the Bitcoin mining frenzy to the California gold rush. At first, the early forty-niners (or gold seekers) simply panned for gold in rivers and streams because gold was so richly concentrated in gravel beds. Once the easier opportunities were exploited, newer techniques were developed such as hydraulic mining and dredging. Beyond this, industrious miners found they had to form groups or partnerships to be profitable. Mining for Bitcoins also becomes more difficult as more coins are mined. New and more powerful mining tools are being developed. In fact, a whole new class of hardware infrastructure vendors has emerged to satisfy the needs of Bitcoin miners.

How does one mine a virtual currency? Mining virtual currency like Bitcoin requires solving cryptographic puzzles. These puzzles increase in complexity as more virtual currency is mined. With the early and easier puzzles, people cloud mine using home computer. Later, people started using more powerful tools with GPUs (graphical process units) that are better at cryptographic calculations. In 2013 we saw the development of custom ASICs, specialized chips designed for mining power and efficiency. Furthermore, Bitcoin miners have pooled together to improve efficiency.

Virtual currency seekers have also used public clouds for mining. For example, when Primecoin, a Bitcoin alternative emerged, public cloud provider Digital Ocean was flooded with people mining the new currency. While one might think that leveraging a public cloud service like Digital Ocean or Amazon Web Services would provide good economics for mining virtual coins, that is not the case. Amazon Web Services to mine Bitcoins at this stage is a money losing proposition. Perhaps using a general purpose cloud service could be profitable when a virtual currency is just starting to be mined and when the cryptographic puzzles are easier.

Virtual coin mining is much more efficient with a different type of infrastructure, specialized hardware that is purpose-built for the mining workload. Since this hardware can be expensive for an individual to acquire, new companies like Cloudhashing are offering mining solutions as a service, e.g. consider this Mining-as-a-Service. Through Cloudhashing, consumers can access specialized mining infrastructure without having to invest in and manage it on their own.

The Bitcoin example shows that, in order to be profitable, there are workloads that require different infrastructure than most clouds provide today. If we consider Amazon, its public cloud service was built using spare capacity for the same servers it uses for its own business. So a business similar to Amazon, with web servers and web transactions will likely find it is optimized on Amazon’s platform.  Perhaps cloud providers will, in the future, diverge from today’s more homogeneous infrastructures and provide more differentiated infrastructure resources for new workload types.

At this point, we can only speculate at how the virtualization of currency will impact our work and lives. In information technology (IT), virtualization has driven significant improvements in cost and usage efficiency. Virtualization has enabled cloud computing, dramatically transforming the way we provide and consume IT. More and more, consumers of IT have direct access to the resources they need and no longer need to wait for a centralized IT organization to fulfill their requests. Will virtualization of currency have the same level of transformative impact on our monetary and banking systems? Time will tell.

One comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s