Bitcoin Forum

Hi there,

I've been talking to one of the members for which I have a great respect (if he wants to reveal himself, its his choice) about the ASIC/BFL/mining/apocalypse situation, and maybe there's a solution, or more a direction that the community can take.

The problem:
The problem with ASIC is not a technology problem, it's a market problem. Mining is tied to Bitcoin price/difficulty ratio, that's the market of mining. Everybody knows the price, everybody knows the difficulty, after that, it's only about managing the costs of doing it. In the CPU-GPU era, the prices of the manufacturers are independant of Bitcoin mining. A 300$ Radeon card is aimed at the gamer market, and miners usually worked around it. FPGA were aimed at Bitcoin miners, but the prices of it were still tied to another market. A Spartan6 is not priced depending on the mining market, but depending on the FPGA market.

But today, a wild ASIC appears!

ASIC development cost are high, really high. But the production cost is low. For the manufacturer, it give a lot of freedom for the price. You can price it really high, or really low, and it's possible to still make profit. So, the goal is to find the highest price possible to sell the most. The thing is, the manufacturer knows the mining market data. It simply have to calculate the price/difficulty ratio, and it gives him a good idea of how much it can price the ASIC. The price will be adjusted so the miners can get an interesting ROI. But if the miners buy and mine, the difficulty goes up, and so the ROI goes down. The manufacturer can play this game again, adjust the prices so the miners get an interesting ROI, miners buy, difficulty goes up, and the loop is created.

If miners quit the market and the difficulty goes down? Same thing, manufacturer can adjust the price again, and we have the same result. Why do we have this situation? Because the manufacturer AND the miners are fighting for the same profit. Those two groups profits from the price/difficulty ratio and every for-profit organization wants to maximize the profits. Since the mining data is public, miners have no leverage on the manufacturer. They can't make ASIC, they can't use alternative products, and they can't go for another market. Yeah, there is the electricity cost, but it will stay irrelevant as long the manufacturer can move the price up and down. It will matter again only when the ASIC price will be fixed (like the lowest possible without any possibility of going up again).

I'm saying manufacturer, and not BFL, because the same problem will happen either there is one, two or fifteen manufacturers. As long the manufacturers are for-profit organization, they will try to maximize their profits. If we have many manufacturers, two phenomenon could occur. We could have a price war, that will race the ASIC prices to the bottom, and could be interesting for miners. We could also see the manufacturers just follow each other with their prices (similar to what it's happening with gasoline), and the problem stay the same. I doubt for the price war, because they need to pay back the ASIC development.

Are we doomed?
No. Outside of mining, I doubt it will be a problem in a short-term perspective. It's not in the interest of the manufacturers to endanger the network, because their product is viable only for Bitcoin mining. The network needs to be in top shape to make profit. The miners though will be stuck on a leash. Their profit will depend directly on the manufacturer, and it certainly create a bad relationship. The network will be secured, but I don't think that giving that much power on a couple of entities is that great for the network. Having mining decentralized but with an enormous influence from the manufacturers, is, IMHO, probably worse than a 51% attack. Manufacturers could influence indirectly 100% of the mining network. I don't what could happen, but to know that "oh, those 5 business sell hardware for miners, have all control on the prices and can influence the profits of the miners", I'm not sure if it's that great to have.

The counter-attack
Yeah, for every strength, weaknesses exist. The problem will exist only if in the presence of for-profit organization, because they have too much power over the profit pie. If we remove the for-profit in organization, we solve the market problem.

From my knowledge, there is two options:
-A real non-profit organization, like a foundation or something. I don't think that with the current technology needs, it will be really appropriated. I don't vouch for this one.
-A cooperative. <---- Oh yeah!

What's a cooperative? It's a business owned by the members. Every member have an equal share in it. To be part of the cooperative, you usually pay a social share (like 5$), and you become a member. Members have a rebate to products of the cooperative, and, at the end of the year, profits are redistributed to members. So, a cooperative is not about who have the biggest capital, but who is a member. The most member a cooperative have, the better its health.

A cooperative is a business and is managed like a business. The only difference is that every member decides, every member have only one vote. With a good group of members, it can be competitive against many big businesses. For example, here in Quebec, a cooperative named Desjardins is currently owning the banking sector in the province. It's been kicking the ass of real banks and big banks for more than 100 years, and as a result, banks are really kind and almost lost their shark-teeth.

An ASIC cooperative will give the possibility for miners to become a part of the manufacturer. Instead of fighting against manufacturers for the profit pie, they will be on both sides of the fence. If the cooperative sells well and makes profit, miners will get a share of it. It will not be a fight of manufacturers against miners, but miners against miners. The fight will refocus on getting the lowest mining cost again.

A cooperative doesn't prevent for-profit business from entering the market. But an effective cooperative can change the paradigm of the market, since the cooperative is a for-members business, and not a for-profit business. Also, every member can access the financial data of the cooperative, decide, vote and work in the cooperative. The model is a lot more similar to how Bitcoin was envisioned first.

When are you launching it?
I don't know, I'm only here to start a discussion about it. There's like 60 000 members on this forum, I'm pretty sure we have enough human capital to make something worthwhile. I have interest in mining, but I can sell tomorrow if I think the market is poisoned.

I also think that it's probably the only way to launch an ASIC after BFL. If some organization here thinks it can launch their ASIC 6 months after BFL and make profits...I really think it's going to be hard. The market is small, and there's a capital limit on it. You can't make more profit than it exist, and BFL can probably take a good chunk of it in the month where you're not there.

If there's only for-profit manufacturer, I'm probably out of mining. But if a ASIC cooperative comes by, I'm ready to take the risk for it to succeed. Either the miners fight an already lost war against for-profit manufacturer, either they take back the market through a cooperative.

I'm going to monitor this topic, and I don't know if the cooperative model is really popular around the world. So if you have any questions about cooperative, just ask.

And if you can build ASIC and you are interested in this business model, well, it's the time to become bigger than Jesus and Elvis. ;D

*EDIT*
Mods, I know this topic could probably be better categorized in Economy, but since the shitstorm is here and is about miners, I think it's better here.

https://bitcointalk.org/index.php?topic=88008.0

Ok, I've read what this project is about, I've mis-read at first.

It's not what I propose. It's not about making a cooperative to buy ASIC from manufacturer, but to manufacture ASIC through a cooperative. The cooperative build the ASIC and sells them, and doesn't mine with them.

Still, I wish you good luck with your project!

We need people with writing talent :D. Please read the IPO description and give us your thoughts.

Yeah, I've edited my message after reading carefully your IPO. Here's the esssence:

Sympathetic as I may be to the idea, Im not sure I understand how this would solve the problem, in so far there even is one.

The "problematic" period happens when market price is very far above marginal cost. As you point out, that allows the asic vendor to lower prices constantly and faster than its customers can get a return on their investment, thereby potentially preventing them from achieving a ROI. But even with just 1 company, that situation will come to pass relatively quickly. BFL will want to keep selling, and thereby keep increasing difficulty and lowering prices until they reach near marginal cost and it no longer makes sense for them to lower prices, even if it means hardly any sales.  I would guess this takes a few years at most, assuming bitcoin price remains +-stable.

Now if I understand you correctly, you would want to accelerate this by developing an asic and selling it straight away at close to marginal cost? even if that means you will not be able to recover your investment? Whether as cooperative or for profit business, development is going to cost a fair chunk of money. Are coops immune to bankruptcy ? :). Or do you expect its members to eat the losses?

More over, accelerating this trend will cause a bigger bloodbath among existing miners. I dont know if thats so desirable. If anything, I would hope for miners that no competitor to BFL emerges, because for them it would make a bad situation a lot worse.

This might have been a good idea 6 or 12 months ago, but unless BFL is pulling off a giant bluff, it seems too late now. Difficulty will explode, and BFL will be able to exploit that and make a very nice profit. If you cant get a product to market around the same time, there is nothing you can do about that.

i think the manufacturers will have more profit by not selling to anyone but mine with there asics. at least for a while ;)

P4man's concerns seem pretty much right to me. BFL, unless they are lying in a really egregious way, are way ahead of the curve compared to actual or potential communal-feel-good ASIC projects (including the open ASIC project that has been puttering along for a while now). Frankly, I'm just glad that BFL is at least roughly at the same point in the curve (maybe even a little ahead) compared to Vladimir's project, since he has no intention of sharing the technology. So, we may have to deal with the "evil" BFL (actually I don't think they are all that bad), but that's better than nothing. It may be pretty difficult for those behind the curve, even if they are non-profit, to catch up. The thing I'm most worried about is bitcoin forking. If BFL and Vladimir corner the ASIC technology market, I wouldn't be surprised to see a call for a move away from sha 256, even if it isn't really necessary security-wise (but of course this will be the "official" justification for it). If that happens, bitcoin will probably fork and lose a lot value no matter which fork one decides to travel. I will probably keep mining regardless, but the second I get a wiff of the break from sha 256, I'll probably start selling my coins as I mine them rather than holding. One thing for sure, there's lots of drama in bitcoin's future that will make the drama we've had till now look like nuthin.  

Im sure some people will call for a fork, or even go for it, but I cant see it gathering any real traction. Whatever other algorithm you decide upon, it can be accelerated by another ASIC, so its going to happen again at some point. Will you keep forking and changing the protocol? It makes no sense, its gonna happen, so it may as well be now. I think most people will understand that and not follow a fork which only purpose is cutting off the legs of the first vendor(s) who invested heavily in to bitcoin.

I still think some type of co-operative can work to at least provide reasonable competition and possibly get devices into more people's hands.

Maybe even just focusing on 10 GH/s devices and selling thousands of them. If you could make those available for around $100 I'm not sure people would care if they ever really made their money back. If the ASIC production after initial development cost is really extremely low, maybe these devices can be manufactured for $50. If you sell 10,000, well you've got $500,000 to pay off the development cost.

The co-op could simply put up money as a bond possibly to fund the development and then get a payback of their initial bond investment + maybe 5% interest like a municipal bond. If the organization is a non-profit and incorporates as one, this would be no problem.

I'm sure there are plenty of great minds involved in bitcoin who would donate their services/skills to development and administration. I would certainly be willing to help with administration and any business aspects for no payment.

The idea wouldn't be to screw any private vendors, just simply ensure there is some competition and preserve the decentralization of mining for the health of the network.

We might even find some pretty heavy private donors in the tech sector if members of the community have the right connections. We could then pay an annual membership fee as suggested to explore other projects which could help bitcoin's growth and development like funding bitcoin business start-ups, etc.

I hope you are right, but my point was more about people freaking out that BFL and Vladimir had cornered the ASIC market, not just freaking out about ASICs in general. A lot of people seem to have the attitude that they would rather stop mining than give any business to BFL, and these people might find the idea of a fork very attractive, even if it only delays the inevitable. Hopefully sanity will prevail, but sanity and BFL don't seem to be great companions on this board.

You really think you could sell $100-500K worth of stuff that can not make a profit? I highly doubt that. People may be very vocal about issues like these, but when push comes to shove, I doubt you will raise much more than a few thousand dollar for an non profit venture with an unclear raison d'etre.

BTW, you would face similar issues as BFL, like, who gets the first ones?

There is a big difference between what vladimir said he was planning (something I never took very seriously btw, and still dont), and what BFL is doing. One, if it was serious, really posed a potential threat to bitcoin, the other, if you put aside the tin foil hattery of hidden backdoors and what not, is only a risk to people buying in to it. Since no one forces you to become or stay a (for profit) miner, I dont see the big problem.


I will probably also stop mining, and not give my money to BFL. Not because I particularly loath them or anything, just because I dont think its a rational investment. So what? No one is going to miss my few GH (or that of any other current miner) :)

Now its possible these miners will look for something else to mine with their hardware; like litecoin. But will that spur litecoin adoption? I dont see that. It will just push up litecoin difficulty to the point where its equally unprofitable to mine as bitcoin or anything else.  The same would happen to a bitcoin fork. It would be worth almost nothing initially and likely have a comparatively gigantic hashrate, making it unprofitable almost the moment its forked. So why push for that?

Nah, I think bitcoin will be okay for quite some time. Some people are poised to earn a lot of money, some are about to lose significant amounts of money. Thats all.

Yes, this is true.  My question is, why should miners drive off a cliff if they know one is approaching?

It is possible, however unlikely, that miners cooperatively protect their interests (this is not a "feel good commy thing" lol) by planning and taking necessary action to form a cooperative rather than selling out in a big way to BFL.

Ive been looking for a good analogy to help explain this, like something in game theory, but I havent found anything. Its really a quite interesting situation by itself, and I cant believe its unique, but the closest analogy one Ive found, is the well known dollar auction (http://en.wikipedia.org/wiki/Dollar_auction); its quite different in many aspects, but the parallel is that in both cases, there is a large potential profit to be made, yet anyone participating in the game, even rational actors, are forced to behave in way that is irrational and leads to individual losses for everyone, except the seller who makes a windfall profit.

Now if everyone truly understood this, BFL would hardly sell anything. But the reality is that a lot, if not most potential customers dont fully understand this, and price/difficulty will be determined by those that understand this least. And heck, even if everyone understood it, there would be some willing to bet they were one of very few taking the risk and therefore think they will still come out on top. Seeing how many gamblers we have, thats probably a LOT of people :).

How about communism?

Satoshi Nakamoto <=> Vladimir Ilich Ulyanov Lenin
his "White Paper" <=> collected works of VIUL
Gavin Andresen <=> Comrade 1st Secretary of the Central Comitee
opression by Fed and banks <=> oppression by factory and land owners

Nassim G of BFL <=> Lavrentiy Beria of NKVD
Luke-Jr <=> Leon Trotsky
Erik Voorhees <=> Maxim Gorky

??? <=> Animal Farm
??? <=> Boxer horse from A.F.

The analogies just write themselves. I had to censor myself to avoid being too offensive. I'm quarter-literate in Russian, and I can understand some of the humour on the Russian board below. Those guys there have a wicked sense of humor; e.g. if there's talk in the core development team of changing SHA-256 to something else BFL could hire killers, put a contract on Gavin & Luke or have them extradited to Sweden for alleged rape.

Now, that's an astute statement.  And the reason why I hope these threads are educating everyone to the risks in hopes that they take pause when/if presented with an alternative.

No, the cooperative is a business. It needs to make profit.

The difference is, where miners lose their profit in the hands of a for-profit organization, miners will lose their profits towards a cooperative that they own. Overall, the profit they lose while mining goes toward the pockets of the cooperative, that they own and manage. It will still be the war out there between the miners, but that's what we want. We want a decentralized network where there's no monopoly, open to everybody.

With a cooperative, miners can be a manufacturer. If a miner doesn't want to, he's not forced either. He can still buy from BFL or other companies. It's only to give another choice.


No, again, it's important for people to make their money back. It's not a charity. I'm interested only on the balance of power in the mining market. We are going to shift toward a market where only the manufacturer holds the market. Miners will be similar to puppets.

Overall, I don't see the point of having a so wonderful decentralized currency that no ones control, when in one of the most important function of the currency, the mining, manufacturers hold the miners by the balls. Even if it's only for a while, it can still be a long moment. What if the manufacturer decides that the ROI on its product should be 2 years? And price them accordingly? What are you going to do? Cry? Make a shitstorm on the forum? I mean, since BFL started pre-order on Singles, we saw everything here. Is the shipping really faster? Do BFL hold their promises of 4-6 weeks? What about a non-paypal refund?

With Singles, we still had the choice. We could buy Icarus, x6500, Radeon 7970, Ztex, etc.

Now, when BFL decides next year that its trade-up program is 25% of the value, what are you going to do? Threaten them to go elsewhere? Complain? Shitstorm? Bring a lawyer? Even if there is competition, manufacturers only have to keep the same price range, split themselves the market, and profit each other like oil companies are doing.

There is no leverage of power, and we can't have a superior entity to supervise the market(like a government). I really don't see that as a positive thing for the network. Like I said, the problem is not the ASIC, it is who control the ASIC production.

I don't see that it's as bad as you make out. We know that Bitcoins will be mined at the same rate over time regardless of the speed of the network. Setting ASICs and FPGAs aside for the moment, let's assume someone buying a $1300 GPU rig today could have it paid off in 12 months. How did they do that? By getting a small share of the coins mined over that time period, essentially determined by their share of the total hashing power of the network over that period. Let's say this miner goes for another 12 months after the rig is paid off, earning $700 over the cost of the rig. Net profit=$700 (I'm not including income from selling the rig since you can't sell ASIC rigs except to other miners). Now let's suppose ASICs come out 24 months from now and this same person decides to spend $1300 on an SC BFL single. Many others will be doing the same, so the difficulty will skyrocket. But this miner also has 40 Gh/s now. Why can't this miner pay off the new rig, and keep going to make a profit? Maybe it will take longer than 12 months, or maybe it will take less if this miner gets the ASIC rig early in game before very many others pile in. The difficulty will skyrocket, but this person's hashing power has also skyrocketed. I see no reason to think this person's fractional share of the network hashing power can't be enough to eventually pay off the rig and get into profitable territory. Obviously I have hypothetically supposed ASICs won't be out for 24 months, but this is a thought experiment, so that isn't relevant. If GPU mining can be profitable now, I don't see why ASIC mining can't be in the future. The difficulty will increase dramatically, but so will the hashing power/$ ratio. I'm not really committed to this line of reasoning, but I don't at the moment see where it goes wrong - would like to know why you think ASIC mining is a losing proposition. The analogy to the dollar auction was just too loose for me to figure out what you are thinking.      

Let's suppose buying a 1300$ ASIC rig could be paid off in 4 months. Me, the manufacturer, I know that you're going to pay it off in 4 months, because I just calculate it using the price/difficulty ratio. So I decide, because of the crazy demand, to up its price to 3900$. Now, your ROI is 12 months, and I make a lot more money. It's still a good ROI, but you, the miner, take all the risk. If the Bitcoin price crash after 4 months, I don't care, and your ROI become 14 or 15 month.

If you're angry at me for tripling the price like that, why should I give a fuck? You can't buy better anyway, because a 3900$ investment with a ROI of 12 months is better than a 400$ investment with a ROI of 80 months.

If, after a couple of months, the ROI on my products become 24 months, and they are selling less, I could just reduce the price. I decide to sell them at 1950$, the ROI become 12 months again, and I start selling again. You bought them at 3900$ 2 weeks ago? Tough luck buddy, deal with it. My marginal cost is 100$ anyway, so I can play with the price like that to maximize my profit.

You can complain if you want, I don't care. You can go see another manufacturer, it's still the same game. The manufacturer-B will calculate the same way as the manufacturer-A, because he wants to maximize its profit. I don't believe a business who come and say "oh, I'll leave some profit on the table, I'm here for the good of the network". It's simply bullshit so you buy from them, and they maximize their profits.

sub

Added to Watchlist: https://bitcointalk.org/index.php?topic=90136.0

Gotcha - I'm not assuming manufacturers are going to do this, at least not to the extreme of your example, but I suppose they could. Assuming the difficulty increases more gradually (as well it might if BFL is the only supplier), ASIC rigs purchased early in the game would be worth more since you can get more coin with them. If price of rigs drops gradually as difficulty increases, this may offset partially or completely any advantage of getting in early, but the time to ROI may not be affected much. Also, if BFL was really thinking this way already, I would think the projected prices of their rigs would be a bit higher than they are now. Anyway, I see what you are thinking now - it's possible, but not inevitable IMO.  

They could, that's the problem. They will be in a position to do it, without consequences. We could try to guess all day if they will do it or not, but that's not the point. The point is, because of that technological shift, an exclusive group can achieve complete dominance over another group. And that happens in the heart of the security system of Bitcoin.


Maybe, maybe not. I'm not in a crusade against BFL. I hope their project succeed, because they worked for it. I'm only looking to create a balance of power in the mining market.

And you have my best wishes on that. I'm all for the balance of power. I do worry that it will be hard to catch-up, but i'm totally behind the intended result. Would I be willing to put some coin behind a project like this? Maybe, but I guess I'd want to see which showed the most promise of success first. Will be following. Also, I'm glad this isn't simply motivated by the reactionary "BFL is evil" attitude that seems so prevalent on this board.

Be very clear that it is entirely probable that current network capacity will double within 3 months of BFL shipping ASIC based products.

BFL's intent with their pricing will not be known to us unless they reveal it.  It is easily discerned that BFL's pricing is sufficient, based on their estimations, to recover NRE costs and to profit.  Once NRE costs are recovered the profit margin increases.  Going forward once a miner, or potential miner, cannot justify purchasing a BFL product based on quoted pricing due to much higher difficulty - long or infinite ROI - BFL would be compelled to lower unit pricing to maintain sales volume.  The point is that once NRE cost has been recovered BFL has significant latitude to reduce unit pricing thereby promoting a more rapid network capacity growth.  Both of these events would equate to negative ROI impact for early adopters of ASIC products.

To put this in to perspective.  Estimations are that ASIC chips can be manufactured for $.10 - 1.00 per GH.  Once NRE is no longer a concern, even including all other costs of doing business, you can see for yourself the latitude BFL has in pricing ASICs.

The idea is already germinating:

"So, in this arena - price wise what would be a very reasonable estimate of how much it would cost BFL?
(so I know if the major effort to very slightly possibly invalidate sha256 would be worth the while to kill their company)"
-kano (posted in "Lancelot" official discussion thread)

Much as I like and respect kano, this is the attitude that has me slightly concerned.

You could make an argument that it would be in the best interest of miners if BFL has a monopoly on the bitcoin mining hardware business.  Ideally the price of the mining hardware would remain as stable as possible.  Yes, it may drop over time, but hopefully not too quickly.  If there's an ASIC competitor, then it could end up being a race to the bottom.

So if you think BFL will have no competition, ASICs might be a good investment.  If you think they will have competition, maybe not such a good investment.

+1

Don't bother respecting Kano. He's a crybaby at best. He called for my BAN from the forum for posting a fake screenshot of my CGMiner performance and talking about a Malware app that was circulating around the bitcoin world (THAT I NEVER EVEN HAD, OR POSTED A LINK TO).
I can think of far better reasons to BAN me, than THAT....LOL

If he's not crying about, or fighting, in regards to the development of CGMiner/BFGMiner....then he's up on 'his soapbox' about something else.

He's done great work for CGMiner and it's backend, but at the end of the day, he's just a little girl.

Wonderful example.   There is another zero-sum game that comes to mind.  Its in a book in my library, let me see if I can find it online, if not, I will just type it up.

It is possible to make permutating algorithms for FPGAs rendering ASICs pointless.

Like this thread stated earlier, FPGAs and GPUs are not driven by the bitcoin related market.
This means that for each new process node (28nm, 14nm etc) the generic hardware is available to all and prices are not influenced by bitcoin mining.

For the ASIC market to function properly there would have to be a lot of competition to drive down margins.
They must also make enough money to follow the advancements of the silicon industry at all times.
Currently bitcoin is nowhere near the size needed to support this.
This fact makes it much easier/cheaper for irrational players to attack the network compared with a system where ASICs didn't have any advantage.

With the current algo bitcoin really needs ASICs to protect itself.
If there is a 51% attack,  I think algorithm changes are inevitable.
 

I think the stated problem is exaggerated. There is an equilibrium where the rig price is so close to the marginal cost that it's not profitable to reduce it further. This can work with 1 manufacturer but the more manufacturers, the more stable the equilibrium. Without fixing prices, no manufacturer can arbitrarily increase prices too much. The equilibrium also shouldn't be too sensitive to the BTC rate - doubling the rate won't cause the rig prices to double, as the difficulty will also increase so they won't generate twice as much revenue.

The healthiest way to converge to this equilibrium when there's just 1 manufacturer which is leaps and bounds ahead of everyone else, is to start by pricing it similar to the competition, and gradually decreasing the price. Based on their announcement BFL don't plan to do it responsibly in this way, which is a cause for some concern.

That said, I will support an initiative to develop an ASIC mining solution which is not by a company who tries to hide the fact that their target market is Bitcoin miners on one hand, or that plans to centrally do all the mining itself on the other.

There's a very simple game-theoretic model for this, and the key factor is time. Someone who buys a rig knows his profits will decline as more rigs are bought, but he hopes to make up for it in the time until this happens. This leads to a natural and steady decline in prices and increase in difficulty.

Let's assume that the current network hashrate is 12 TH/s and BFL starts churning out 1 TH/s rigs at a rate of 1 per day. After X days, there will be a total of X+12 TH/s, so let's assume the profit per day for a rig is 7200*0.999^X/(X+12) (the exponential factor is to account for reward halving etc.) Then a potential buyer at day N expects to receive $\sum_{X=N}^{\infty}7200*0.999^X/(X+12)$. That's a nonelementary expression but the first 10 values are 28410.8, 27810.8, 27257.5, 26744.2, 26265.7, 25817.5, 25396.1, 24998.4, 24622.1, 24265. So a buyer on day 0 can expect to get 28410.8 BTC out of the rig, so that's what he should pay for it, and that's more or less what BFL should charge for it; on the next day it should charge 27810.8 BTC, and so on.

Of course the offered model is extremely simplified but it demonstrates the point. Additional factors such as differing skills and opportunities among potential buyers, uncertainty regarding delivery times, and a bit of irrationality for good measure just enhance the possibility of a stable equilibrium.

Im not sure $\sum_{X=N}^{\infty}7200*0.999^X/(X+12)$ is an analogy that helps me explain it to someone who doesnt get it. I was rather hoping something involving nickels,  dice or playing cards :)

That said, you are assuming you know BFL production and sales rate and you assume its constant; that is the key factor. In reality we have no clue. We can only find out roughly, after the fact, once those machines start hashing. Moreover BFL can vary supply as they see fit. Start with a trickle and gradually increase it, constantly fooling its customers who are trying to guesstimate the speed at which hashrate will increase.

Right, it's not easy to decide how much to pay, but there is an equilibrium and whoever makes the best job estimating the future wins.

I don't think BFL has much reason to artificially limit supply, demand should be high enough as it is. If they wanted to do that they'd be better off investing in something with a smaller NRE in the first place.

As far as verbal analogies go, a dollar auction has some resemblance but the quantitative difference means not much of the intuition is transferred. A classic example of time-sensitivity is negotiation between two people dividing a pie, where the pie slowly rots/eaten away by someone else while they're arguing. They'd prefer to make some fair division early on rather than constantly making counter-proposals which will end up with each of them getting less.

What about a limited lifetime price protection ?

Say a manufacturer drop the price on ASICs from 300$ to 280$ at a later date they would have to offer a 20$ in refund or credits for future purchases.

A more complex formula could be devised to account for production cost, USD devaluation and miners profits.

Such a scheme would give much more confidence to investors who wouldn't fear the lowering prices and reduced profits.

Put yourself in BFLs place and think about it.  As difficulty goes up because of these asics, its inevitable that future prices per GH will come down, pretty much proportionally. What you are suggesting boils down to BFL getting cash up front,  but really selling at the lowest future price from day one, and therefore assuming all the miner risks (while selling the opportunity). If they want to assume these risks, they would be better off mining themselves, then at least they get to keep the opportunity.

Your suggestion would be dangerous and likely very expensive if they maintain a monopoly, it would be financial suicide if a competitor (or large asic miner) would appear.

Much simpler would be for BFL to make public their production planning and simply state how many TH they will ship over what time period and contractually bind themselves to that. If they do that, they could auction off their hardware to the highest bidder to maximize their revenue, while buyers would still be able to make an informed purchase decision.  The problem when a potential competitor emerges remains though.

Using a very plain interpretation my opinion is that the price to pay is one that anticipates conversion of ~80% of the mining base to SC, and all the re-investment by miners that entails, and allowing a modest profit.

The question is the $38 dollar per GH question.  My estimation is at that price BFL stands to have minimum revenue of $5 million.

Even if we assume BFL ship after the reward halving, their hardware should be able to mine almost $8M per year at todays price. If they manage to only get $5M revenue from selling, they are doing it  wrong.

This got me thinking about a different model: The glove game (http://en.wikipedia.org/wiki/Shapley_value#Glove_game). BFL has the right glove and each of its potential customers has a left glove (BFL doesn't have a left glove because it doesn't want to speculate on Bitcoin). With n customers, the Shapley value for each customer is 1/(n(n+1)) of the total reward, and for BFL it is 1-1/(n+1). Meaning that with 100 customers, BFL should be getting about 99% of the reward.

Again this is highly simplified, but it does indicate that BFL may have more leverage than we'd like.

What motivation would BFL have to do that? They probably can't estimate their production very precisely, it partly depends on the manufacturers they rely on, and there are bound to be unforseen snags. And given how they are treated on this board, the slightest deviation from their stated plans would raise a chorus of bitching, accusations of foul play, conspiracy theories, and calls for lawsuits (which might turn into viable lawsuits since they have bound themselves contractually). It would not be smart for them to bind themselves contractually to this, especially with a community that has treated them like crap from day one. But even if they did, we would be foolish to take the projected plans seriously. We already know they are not good at estimating the specs of their equipment, and even worse at estimating ship times. It would be nice, though, if they could give us more information that might allow a very rough calculation of their production rate. But it would probably be unwise for them to do even this, since if the information turned out to be off by a factor of even 2, the inevitable bitching would fire up. So I seriously doubt we are going to be able to make informed purchasing decisions - early adopters of ASIC mining equipment will be taking a big risk, but the big risk does carry the possibility of bigger reward IMO.  

I think you nailed it.

Like I said before, BFL, by being a manufacturer, is not stuck behind the 51% rule. They can sell to 100% of the miners, and aim at the same profit pie than the miners. I didn't knew about this glove game, but it's probably the best mathematic problem found so far to explain that situation. Dollar auction was interesting, but it doesn't have a hard limit (the auction can go to infinite) while the mining market have a limit.

None, if maximizing profit even at the expense of miners profitability is their only motive.  But auctioning off a predictable supply would allow them to maximize their profit without tricking their customers in to losses, so if for some reason they care about miners, this would be a good way to do it.


If they produce less than promised, Im sure customers would forgive them :) Well, at least as long as they only accept money for the rigs they can actually ship.

So is your idea that the contract would state that they won't exceed X production rate? I can see how that would allow miners to make more informed purchasing decisions, but it isn't appealing from BFL's viewpoint to artificially cap their sale rate. Personally, I'm not too worried about this. Given their track record, it is somewhat doubtful that BFL will flood the market with ASICs - it will probably be more of a trickle as we've seen with their FPGA units, and I doubt their prices will drop so rapidly that early buyers will be screwed. Sure, it could happen, but if we are going to sweat over remote possibilities, we might as well sweat the possibility that Bitcoin price will crash to a buck too. I'm not aware of any investments that promise a high return that don't also carry the risk of substantial loss. If BFL implemented your idea, it would make the investment safer, but it would also reduce the potential reward for early adopters. So your idea only makes the situation "better" for those looking for a safer investment. It's not good for those looking to gamble more for a bigger win.

BFL's SC margin will allow BFL to spend more to have more produced quickly.  It's almost trivial cost to manufacture the chips and at that point they can justify more capacity for assembly. 

The problem with ASIC is that it will be far more profitable to buy Bitcoin and reap the benefits of ever-increasing difficulty from ASIC than to buy miners and wonder if the difficulty is going to increase so quickly you become unable to get a solid ROI. No matter HOW beneficial ASIC is, the inevitable price increase to match the difficulty is going to be much more profitable. We saw it with GPU when people were starting their GPU farms, we'll see it with ASIC farms, too.

What makes you think btc price will increase?

Yes, but the scenario we are worrying about is one where early buyers end up paying much more for ASIC rigs than later buyers (or so I thought), and if BFL drops price quickly, their margin drops along with it.  

The reward drop. It's not a guarantee, but it will help the price to go up.

I tend to agree with this statement as well.   People hoarding BTC is another factor so the supply of coins for people wanted to enter the market will be more limited so they will have to place higher bids to get the BTC they want.  That would be shown in price appreciation.

What a noob. You still think high difficulty = high prices ? Price is influenced by difficulty ? ::)

LOL ! Only thing to cause price rise to $10 is reward drop in Dec.

I can almost guarantee you $10 pricepoint in Jan 2013 ...

I agree with what you say, but since I created that topic, I'm not interested in seeing a lack of respect towards another poster, even if he made a mistake. I would like to keep the discussion clean, and you probably want it too. Thanks.

Raize, like bulanula said, price and difficulty are not completely dependent of each other. Sure, if the price is horrible, difficulty will go down, since miners will close their rigs (like it happened last Autumn). And if the price is in the sky, more miners will join the game, upping the difficulty. But if the price stay constant, or move slowly, difficulty with ASIC could jump 100x without affecting the price.

It's possible that the Bitcoin crash for an external reason, even if miners switch to ASIC and up the difficulty x150.

Are you sure this will give BFL maximum profit? Maybe with their current supply but what about future supply?

If they do what you're proposing, they're effectively giving some big players to hold a big chunk of hashrate. This will 1) create a big barrier for any future miner/BFL's customer, 2) give them ability to hurt the network, which is what BFL's banking on.

Whats BFL's doing so far is the most logical sense, ie. not telling everyone their capacity yet create rush to be one of the "first". This will give BFL's shortest time to recover any  development cost .

i wonder how much money they made and make with their preorder style business plan....  are they really relying on bit coin ....

bitpay converts those coins in to $ right away. That alone may trigger a price drop; over the next months,  BFL is likely to sell more than 1 year of mining is worth, and its all instantly converted in to dollar.

As for the reward drop; the only real argument for that to increase price is lower inflation. That may have an impact, but if it does, it will not be in January 2013.

well the price has dropped --- maybe because miner are buying rig from bfl via bitpay (bitpay selling coin at market price)

The reward drop will impact the price even before it happens, since speculators will buy in preparation for the price increase.

What makes you think they arent already?

Never said they aren't. But the effect is likely to be strongest around the time of the actual halving.

100% correct.

I have seen it myself with SolidCoin. It works everytime.

JUST wait and SEE the panic when Dec comes around and 25 BTC is made not 50 BTC.

This is huge if you actually think about it ... price will surely rise in that period.

I think the price will only double (when the reward halves) when all coins in supply are used for trade in the Bitcoin economy, i.e. are needed

As it is now (but I have no data back that up) most of the coins are simply hoarded, therefore there is no need for BTC/$ rate to rise

The coins that have been mined have a certain value... the fact that less coins will be mined in the future won't make the already mined coins more valuable, unless there is actual demand for them

Again, as long as most coins are hoarded, there won't be a 1 : 1 relation between price & reward halving.... at least, there shouldn't be

Back on the subject of BFL having to lower price due to miner ROI slowing sales;



We first have to try and speculate just how many units BFL can produce and how quickly.  Right now they would have to produce and deliver 12,700~ of the $1300 SC units in order for the ROI from those units to move to over the 1 year mark. This is assuming Nov. 1 delivery so 2 months of mining at 50BTC per block. Jan. delivery puts the ROI at 380~ days.

So the question, how likely is it that the demand is even there for 12k units? The mining market is still not very large. Right now we can see what, 500~ orders?  The problem with the lack of demand is that it will not take for the ROI to be reduced for miners to demand a lower price to continue sales. It could just as likely go the other way around. With BFL finding they have a need to lower the price just to make more sales before the ROI issue comes into play.


And right now speculation math would put them at over $600k in pre orders. Likely enough to already cover their NRE...


(it's all speculation at this point) I will continue to work and rework my math with every changing bit of info.  And I'm more than happy to show anyone where I get my 12,700 40GH unit number from.

Exactly. Hoarding ==speculating. I would guess at least 90% of bitcoins value today is pure speculation, rather than using it as tool to facilitate economic activity. Bitcoins finite supply is already priced in by speculators (hoarders or otherwise), and reward halving is just the mechanism that ensures finite supply.

Now the reward halving will have an impact, but afaics, only on miners who use their coins for something other than hoarding and therefore would have to buy (more) coins.  Logically, that would push prices up, but the effect will not kick in until after the event, and its probably completely statistical noise.

Id love to see it, as Im too lazy to do it myself.
That said, the asic is not going to be the bottleneck. IM guessing a single wafer should yield near 10TH. You cant order a single wafer, typically a minimum order at a fab is a lot of 25 wafers.  PCBs, cases, assembly, etc can (and probably are) contracted out to some Chinese sweat shop. I dont know what these devices will even look like, but I cant say I see a potential bottleneck.

aye, that was exactly what I said. Market demand will be the bottleneck for BFL.. ;p

Math;
First a link showing the difficulty with ~12,700 40GH units in action. Calculated by punching in the total hash of those units and adjusting difficulty until 7200BTC per day is produced.
http://tpbitcalc.appspot.com/?difficulty=71167701.5592&hashrate=509440000.00&exchangerate=6.30&bitcoinsperblock=50.00&rigcost=1300&powerconsumption=15&powercost=0.12&investmentperiod=355
Second a link showing 40GH at this new difficulty and 50BTC block reward. paypack time 368 days.
http://tpbitcalc.appspot.com/?difficulty=71167701.5592&hashrate=40000.00&exchangerate=6.30&bitcoinsperblock=50.00&rigcost=1300.00&powerconsumption=15.00&powercost=0.10&investmentperiod=355
Third a link showing the same at 25BTC block rewards. It's at this point we see the ROI has become what many would consider unreasonable.
http://tpbitcalc.appspot.com/?difficulty=71167701.5592&hashrate=40000.00&exchangerate=6.30&bitcoinsperblock=25.00&rigcost=1300.00&powerconsumption=15.00&powercost=0.10&investmentperiod=355
Fourth link showing that cutting the price of the 40GH unit in half brings ROI back to ~1 year. It does not account for new sales further increasing that time by increasing difficulty.
http://tpbitcalc.appspot.com/?difficulty=71167701.5592&hashrate=40000.00&exchangerate=6.30&bitcoinsperblock=25.00&rigcost=650&powerconsumption=15.00&powercost=0.10&investmentperiod=355


edit; I first arrived at that difficulty by punching in 1 40GH unit at $1300 and pushing the difficulty up until it was over 1 year ROI at 50BTC block.

I should add to that, the benefit to miners is with lower demand for their products at the release price that it is unlikely they will sell enough units to reach this theoretical difficulty(71.1mil) of mine until something changes to further drive demand.

Current orders at about 500, if all 40GH units, if all actually available for release will put the difficulty at about +2.8mil above current at time.

edit; for previous post. I should also add that for ease of calculating I did not consider anything mining besides the newly onlined 40GH per unit asics. Adding in older hardware that will be online in my scenario should not change the overall numbers much.

I would think that there would be a healthy secondary market for these devices considering the lengthy failure rates and promise of better ROI with a used unit.

The OP's proposal of a production+mining cooperative is one that appeals to me and one towards which I'd be willing to contribute a good chunk of cash. This is partly because I think it'd work, and partly because I really like cooperatives as a species of legal entity, and partly because I want some alternative to lining BFL's pockets and if it takes funding an ASIC design then by gum I'll help fund an ASIC design.

(Of course, the organization would have to be spearheaded by someone I could meet personally and in whom I could build some personal confidence. But that probably goes without saying when entrusting someone with this kind of money!)

I second that.

I belive they could solve the 'who gets one first' scenario buy mining with the produced hardware until nUnits are ready to ship or nTime worth of orders are ready to ship. And by paying out those eanrings to the coop members. Then shipping the things as closely together as possible. Atleast for the first big ordering round.

I have to admit I did not quite read all the posts (lazy me), but why the need to solve a mathematical puzzle of who to receive it first and pay what when you are forming a COOP

As I did read before the problem basically comes down to (and we saw that in the halfhearted answer from BFL) either you believe in Bitcoin and think that mining will yield the most money, or you believe in selling Bitcoin products for fiat money and then you do what BFL does.

Starting a COOP by Bitcoin fanatics one would believe that they think mining BTC will yield the most (they are willing to invest in developing a mining product that they then want to buy from the company), so why sell any of the mining products ? Surely the reasoning must be that you make a better return by actually give nothing to the community but just mine the heck out of it before any competitors come to market.

Only when your own mining has become less profitable then selling your 'heavily discounted' ASICs to unsuspected miners at an above ROI price, you stop mining and get into the selling business.

So setup a COOP to develop an ASIC (BFL's ones are probably 6 months away), get 100 - 200 TH/s online, start mining centrally and give all the COOP shareholders a payout based on their shareholdings. Dividends are based on mined BTCs until the point where mining has become unprofitable (a point which might be years away if you are the first to mine) and then start selling ASICs en masse, giving COOP shareholders their second means of generating dividends

Just my 2 cents

Your take on it is very valid. It would really come down to what the members of said coop would want from it. The coop's primary objective would be to function profitably. But how much profit would we need to squeeze from it? Delivering a unit to market versus keeping it solely for mining until it is no longer profitable may be what some members would prefer. I personaly enjoy owning my own equipment even if it is slightly less profitable than what a coop could produce. I would imagine I am not alone. Again, with a coop there will be very many reasons why people would become members. The coop would be obligated to function the way that the majority voted.

Plus the selling of hardware gives that many more options to bond holders. Members could either share the profit from mining and sales or cash in their bonds towards hardware. I like choices even if the optimum structure would be to solely mine and dump when done.

I agree with this statement as well.  The retail buying will be the strongest at the halving.

Ill check your math later, but this needs a rebuttal first:


You seem to forget BFL can price these units almost arbitrarily. If demand slows down too much because the ROI becomes too long, BFL can easily slash prices by 50%, 90% or more. ASICs cost next to nothing to produce, and Id be surprised if any of the other components in the miners would. So slashing prices wont really hurt BFL, their gross margin would go from say 10000% to "only" 5000%;  it would only really hurt previous BFL customers if it spurs another gold rush. BFL can play that game over and over, and they might even begin it before they ship their first unit.

that was my point. we agree on this point I believe. My point in the bottleneck was that it is the only thing that would slow down onlining of more hashpower. That is that rate at which BFL is willing to slash prices.  And my math is very, very rough. I tried to point out some of the things it does not include and that it is a lot of speculation of which units make up the bulk of online units. Not including currently hasing hardware, etc etc. And mosre importanty a lack of BFL's first run production numbers makes any math guess work.

I do look forward to seeing any other speculations on the math though. The more angles on it the closer we will get to the actual imho.

cheers

edit' Yea, just reread the part where you said they could potentially do it before the first unit ships. I have to agree there as well. It would seem on pre orders alone they have likely covered a good protion of their NRE costs. So, what exactly ar the VC's paying for? coffee imported to keep them all working?

Plain simple Explantation:

U and all their valued customers == VC :D

Not I, homey. ;p  I'd rather not mine than support them. But, yea it really makes me believe the VC thing is a bunch of bullshit.

https://bitcointalk.org/index.php?topic=89757.0

At least 46k bitcoin .....

Bitcoin has some fundamentals, and by this COOP suggestion, I'm looking for a way to stay in line with those fundamentals. It's also a way to keep Bitcoin value.

If the COOP would mine instead of selling mining products, it would centralize mining.  By selling mining products, it encourages decentralization. It's the same reason as to why I want to make a COOP manufacturer, it is to encourage decentralized ownership of ASIC production. I want miners to have control over the production and the sales of ASIC.


It's a COOP, it is not a corporation. You can only have one share, so even if the COOP is ultra-profitable, by owning only one share, you're not going to make a lot of profit anyway. The COOP is about other advantages like, for example, simple discount of ASIC products(Get 20% rebate if you are a member!). Also, the voting power for decisions is a democratic one (1 person, 1 vote), not a capitalist one (1$, 1 vote). An interesting use of that could be to let the miners decide the selling prices of the ASIC. You make one vote every 4 months, you put a maximum price variation (like 20%) and so, as a miner, you can project long-term for your ROI, without having surprises from a closed company. You also have precise informations about production and shipping(unlike....you know who), and if you're not satisfied, you are in a position to help the process, since you own the COOP.

I think this could be a lot more interesting for miners than simply making dividends.


I completely agree with this. I've started this topic to help create a discussion, and how people view this idea. For now, I don't have any ASIC manufacturers, and I don't have the technical skills to make any ASIC anyway so I can't start this project. I simply think that, all this ASIC talk will attract competitors, and maybe one of those will consider a COOP instead of a corporation, and contribute to grow this project.

Not sure I follow, why do you use 50BTC block reward to guestimate difficulty target when those asics will be mining almost exclusively when block reward is 25 BTC? I also dont think anyone aiming for 1 year ROI is smart in the asic era, but lets go with that anyway.

40GH=40.000 MH/s. If I tap that in using 25 BTC block reward, I get 1 year break even at difficulty ~34M.
network hashrate= D * 2**32 / 600
= 34M * 7.158.278
= 243 TH
= ~6100 single SCs

Thats a sizable quantity, but not exactly something you cant produce and ship in a whole year (plus a 4-6 month ramp). Its roughly the number of discrete videocards amd and nvidia ship each and every hour.

I used 50 instead of 25 because it does not affect difficulty. It does obviously make more sense to use 25 though since at most we will only see a few months of 50 with new hardware.  I do like your numbers being much more conservative than mine on what an acceptable ROI would be. That will of course vary a bit from individual to individual.

Now the thing with the 6100 units. It's not that I think they would have any issue producing 6100 units(can bet they have an on-demand type contract with the chip foundry.) Its that the market demand is not there from miners for 6100 units. That could be very good for the early buyers or it cold be very bad if it forces BFL to lower prices sooner to encourage more buyers. I suspect many will wait until first release so we can calculate some more accurate ROI numbers. One thing I am certain about is that it will be fun to watch and speculate on for some time. =)

 Its just  a matter of at what price. But even at the given price, if somehow BFL doesnt sell anything like the equivalent of 6000 singles and they do not lower price, those things will pay them selves back in a few months, and if that is the case, you can bet some people will order a racks full of them, just like they did with the GPU rush. FWIW, currently the network is made up of the equivalent of ~40.000 GPUs.

edit: also interesting, this post:
https://bitcointalk.org/index.php?topic=89922.msg990263#msg990263

This is correct, we're shipping about 50 singles and 1.5 mini rigs a day at current rates.

BTW, the reason I think 1 year ROI is far too dangerous, is that its unlikely bitcoin difficulty and therefore price/difficulty and therefore asic $/GH is even predictable within an order or magnitude over a period of 1 year. With GPUs or FPGAs you could be relatively sure the price per GH of the hardware wasnt going to collapse dramatically.

While it's possible BFL could keep slashing prices and make it difficult for miners to break even, it's also possible they'll maintain a relatively stable price.  Perhaps the benefit to them would be more consistent sales to miners.

A track record of keeping ASIC prices stable would encourage more first time purchases and additional sales to miners wanting to add more hashing power.

If the price becomes unstable, they may benefit in the short term, but their customer base would be more limited to big risk takers.

Of course if there's an ASIC competitor, all bets are off.  Only time will tell.

I really like this concept and think it would be an excellent contribution to the community. This goes along with the "credit union" model that many people are familiar with.

In my opinion this would be a true COOP unlike an ASIC based GLBSE offering. In that scenario it is really just another mining investment using newer technology that you are helping purchase. Your idea caters to the need of people that still want to actually do the mining and not just invest. A members mining pool could also be an option for something like this. The ability to get discounted mining gear is great bonus as well.

The possibilities are endless. Imagine if the COOP was also in the Lending business and members could vote on which loan requests to approve and for what business ventures while evaluating risk/reward as a group.

Nice work Brunic......sub.

There are many ways to do this and it needs to be pursued. The biggest question/ hurdle seems to be how quickly can we develop s competitive ASIC product before BFL floods the market.

I personally don't believe they have any shot at fulfilling these orders in any quantitiy by december 2012 based on their previous track record. Also, if they had this legit VC funding behind them, why the hell do they need full pre-orders instead of simply deposits to help them measure demand.

Once again the bitcoin mining community is so obsessed with profit they are eager to fund someone's project interest free and tie up their funds for months on end. How much more could be done with this money if it were spent or utilized to fund bitcoin related business and services?

Are the people in this community just so ignorant about standard business practices that they can't see this is a long con ?

I like a combo co-operative mining effort that everyone can benefit from and also allows co-op members to buy discounted equipment as well. i could see the first large units being used to simply mine on behalf of the co-op members to repay the initial investment which would then allow for reasonable sale prices to co-op members moving forward.

If we could get 4-5 1 TH up and running before any of the BFL units hit the market we could get the initial dev cost back in no time and then be able to sell cheap units to co-op members and effectively put BFL out of business or at least force them to start acting as an ethical business in order to stay in this market.

I could raise probably $50,000 toward this project if someone could show me a way that we could get a custom ASIC by December 1st. I believe that would be AT LEAST one month before BFL could deliver any of their units, save maybe those coffee warmers.

I think we could have raised over 1 million if we had put this together before BFL announced their pre-orders, but don't think for a second they didn't do that as part of their plan to lock up the community's money in order to kill any project like this.'

Once they saw companies like enterpoint entering the game they knew they had to craft a plan to stall FPGA orders and screw every competitor over.