The rise and fall of bitcoin mining: DAG-based solutions aim to cut costs and replace a once-booming industry

By: Dr. Byung Ik Ahn, CEO of Fantom Foundation

The dynamic nature of cryptocurrencies has often lent itself to contentious conversation, with one ongoing debate being the future of crypto mining.

Chinese crypto giant Bitmain announced that it would soon be rolling out a new firmware update to increase mining effectiveness, reinforcing the company as a proponent of mining profitability. Contrarily, Advanced Micro Devices, Inc. (AMD), a chipmaker known for its high-margin crypto processors, forecasted a disappointing Q4 revenue, with negligible blockchain-related sales in the face of dwindling demand from miners. Moreover, late November saw a sharp reduction in mining activities — according to F2pool, the world’s third-largest mining network, an estimated 600,000 to 800,000 miners shut down operations in the last few weeks alone.

Contrasting stances by companies in the mining arena are leaving miners, investors, and industry participants to weigh the pros and cons of mining. Despite record revenues this year — with earnings in the first half of 2018 totalling $1.4 billion and surpassing that of 2017 entirely — the mining ecosystem has seen its profitability rapidly diminishing.

Amid these concerns, mining skeptics have been searching for alternatives to costly mining and verification processes, with Directed Acyclic Graphs, or DAGs, emerging as a potential frontrunner.

DAGs: Solving the shortcomings of bitcoin mining

Retailers and payment providers are struggling to combat the technological roadblocks of blockchain, with issues pertaining to transaction costs, processing times, and security. Even some of blockchain’s earliest adopters — including Stripe, one of the first global companies to offer bitcoin transactions to customers — have suspended their crypto operations as a result of weighing the cost vs. benefit.

The lack of real-world use cases has further hindered blockchain’s mainstream adoption. As developers work to build the next generation of decentralized projects, “beyond blockchain” solutions such as Proof Of Stake (PoS) protocols, alternative distributed ledger platforms, and DAGs have slowly materialized.

Major fees are paid to block miners in order to incentivize their participation and fund the block reward itself. While the role of miners is often required by projects to help verify transactions, DAGs provide a way to eliminate these costs entirely by introducing new, sophisticated technology that can independently process hundreds of thousands of transactions per second.

Innovative platforms have tried to combat costly mining operations with the use of DAGs. Its next-generation infrastructure that manages historical information and utilizes smart contracts makes transactions suitable for real-world use. In its elimination of miners, its unique programming language also addresses scalability concerns. With traditional blockchain technology, increased transactions require increased miner participation and processing, which has notoriously led to delayed approval and decreased network performance.

Navigating a minefield

As cryptocurrency prices reach their lowest point in 2018, those looking to profit through mining alone may have joined the party a little too late. With the costs of computing power rising and miners competing for a block reward that’s worth more than the costs associated with their operation, electricity prices for mining operations have turned unprofitable for the first time this year in September.

The energy consumption required for mining has also made its way into the spotlight, as studies analyzing its long-term environmental implications continue to emerge. Particularly, recent research has shown that the amount of energy expended to mine the equivalent of a dollar of some top cryptocurrencies is more than twice that of most traditional commodities, such as gold, copper, and platinum. Researchers have also begun to study mining’s relation to climate change, with operations coming under fire for potentially contributing to global warming.

With crypto enthusiasts look to push cryptocurrencies into the mainstream, it is clear that sustainable long-term solutions that will aid in decreasing energy expenditure should be a priority. As the industry moves away from the once-booming and energy depleting industry of mining, a sound replacement appears to be in DAG-based technologies.