The invention of Bitcoin, and the blockchain technology that underpins it, is the biggest revolutionary force of our decade. Like the internet in the 90s and the emergence of the World Wide Web in the 00s, it accelerated and transformed the commercial world and the industry as a whole, with technology ushering in a new model of business.
But, the business of Bitcoin mining that initially propelled the industry is quickly becoming obsolete. For the last 10 years, the model of Bitcoin mining has been a business that operates in the shadows. Like miners in the physical world, operations were ‘stand-alone’ in that they could operate while being mostly disconnected from the real world, setting up data centres, performing SHA256 hashing first with CPUs, then GPUs, and finally with faster and more efficient ASIC units. This business paid for the initial build-out of the network infrastructure, but it was funded by the built-in protocol subsidy. While the subsidy was meant to bootstrap the network, it was not intended to maintain it in perpetuity. We have now reached a breaking point where the industry must adapt.
To survive in the long run, growth must be maintained by transaction processors, who will build out the needed data centres, network bandwidth, and computation processing power in order to process more and more transactions. In this new era, transaction processors are compensated through the transaction fees they earn from users. To be competitive, transaction fees must be cheap, comparative to existing solutions, in order to motivate businesses to opt for blockchain solutions over conventional technologies such as the VISA network for payments, a cloud storage provider for file storage, or a standard multiuser database to share data among clients.
Since the beginning, the system of Bitcoin has had a two-fold problem: first, it needed a way to compensate those that would run nodes and support the infrastructure of the network. Secondly, it had to identify how to distribute the native token of the network in a fair and equitable way that did not require a central administrator (lest it runs afoul of securities laws establishment in most countries). The solution to this is the proof-of-work mining system, or the consensus algorithm used by miners. To be clear, operating an ASIC hashing/mining rig is what a miner does. But this was just the way to bootstrap the system. The ultimate goal, once past the bootstrapping stage, is a system that is self-sufficient, and an open economy unto itself.
With the Q2 Halving, we have now entered the 3rd age of Bitcoin (2020-2024). This period will be the last where the inflation rate of Bitcoin will be on par with or above fiat currencies around the world. Note that while deceptively the inflation rate seems to degrade linearly, it is actually on a log scale. More importantly, the slope of the tokens distributed crosses the point of inflexion where the rate of change in the bitcoins issued (blue) is negative (85% of all bitcoins have already been distributed and circulating in the market). So, if we were to stick to the miner analogy, the “Gold Rush” is over. There are no more fortunes to be made by rushing out to the West with a shovel and pick in hand. What does this mean for the digital asset mining industry? It means that those who are still buying shovels and pickaxes will find that there isn’t enough profit to go around to ensure that they can stay solvent. They have arrived at the party too late.
The industry must transform from ‘mining’ to transaction processing. Simply generating proof-of-work in dark underground caves or remote hydropower stations in Mongolia will soon no longer be profitable. Those miners that do not transform their businesses into transaction processors will soon find themselves unprofitable.
This is why TAAL’s focus is on transaction processing. Moreover, we aim to be a vertically-integrated enterprise-grade, blockchain infrastructure solutions provider. We will strive to grow and acquire key businesses that we believe will survive the transformation to the new economy and model for Bitcoin. One that supports limitless scalability, unbounded transactional volume, and where profits are earned by those that process the most transactions, not the ones with the most hash power.
There will be no more miners, only transaction generation (users), and transaction processing (service providers).
CEO of TAAL