Introducing Trustless Mining
Bitcoin mining ain’t easy.
You need an expensive ASIC mining rig and access to cheap electricity, or a company with access to cheap electricity to host your rig for you. Many folks took this leap in the last year — including me. I bought my rig and signed up for hosting with a small company in Texas. I was excited to start hashing away and earning bitcoin. Imagine my surprise when I got a ping from my mining pool saying my rig was offline: it was a classic rug pull.
What’s a rug pull?
It’s when your expensive mining rig vanishes:
The rug pull is not a new phenomena. It not only happened to Compass Mining customers in Russia, but has been around since hosting was first introduced, and has unfortunately become more common in this bear market.
Buy and host bitcoin mining is on the way out
Why buy and host a rig anyways? Is it the only way to mine bitcoin?
Mining rigs are expensive. In the current market you’ll get more bitcoin by simply buying and holding it than you would from buying a rig and mining — and beyond that, the “buy and host” model suffers from two critical flaws:
Asymmetric trust
Trust is one-way when you host your mining rig.
I bought an expensive piece of hardware and entrusted a hosting company to keep it running. Did the host need to trust me in return? Nope. They had my hosting security deposit — plus they had my rig!
Misaligned incentives
What’s more, bitcoin miner hosting companies are only paid to host your rig. They are not paid for its performance. In my case, the vendor frequently shutdown their datacenter for “ongoing maintenance” and did not guarantee uptime or peak performance of my rig.
Why buy a mining rig?
The driving economic incentive behind buying a mining rig is to earn more bitcoin than you would from simply buying and holding bitcoin. Could it be possible to do this without buying a whole rig outright?
What about rentals?
When you dig into rental options, you come across the litany of scams in the history of cloud mining, which have left deep scars on the reputability of mining rental services.
I found two companies that offer rentals: NiceHash and Mining Rig Rentals. These services offer a great intro to mining; however, you likely won’t earn much, if any, profit.
Problems with Bitcoin Mining Rental Agreements
- Only offer short-term contracts up to ~10 days
- Either party can break the agreement at no cost
- Hashrate prices are higher than the going market rate, i.e. higher than the current hashprice
For the customer, mining rentals offer a different value proposition than buying and hosting a mining rig. Less money is spent upfront because there’s no need to buy a rig outright. However, as seen in Cloud Mining, if bitcoin’s price goes up, the vendor might just mine for themselves rather than fulfilling their agreement. Likewise, the renter could default if bitcoin’s price goes down.
What if these problems could be addressed?
Necessary Conditions to Rent Hashrate at Profit
- Long term and future rental periods
- Penalize either party for breaking the contract, i.e. provide bilateral incentives to maintain agreements
- Hashrate price set by an open market of buyers and sellers
This way, earning more bitcoin over time, rather than having simply bought and hodled, is at least within the horizon possibility.
In order to implement these conditions, the first thing we need to introduce is an arbitration mechanism.
Bitcoin (multisig) fixes this
Bitcoin’s protocol can mitigate the counterparty risk posed in cloud mining and hosting through multisignature (multisig) transactions. This technique locks up bitcoin to an address that requires multiple signatures, and thus potentially different parties, to send funds. In addition to the Buyer and Seller, a 3rd party Escrow may participate.
Multisig has a long history of success especially in darkweb marketplaces. It has enabled many transactions between buyers and sellers who have no knowledge of one another, no reputation or appeal to authority, and no ability to trust each other.
Trustless Mining eliminates the free option for the Seller to default and rug pull the Buyer, which levels the playing field between the Buyer and Seller by removing the risk inherent with the Hosted and Cloud Mining models. Trustless Mining works via a 2:3 multisig:
Trustless Mining Example
Let’s assume that a buyer wants to rent an Antminer S19 that produces 100 TH/s for $300/month. Both parties send a security deposit to the wallet address that is then only deducted in the event that one party breaches the contract.
- Buyer and Seller send 20% security deposit to the multisig wallet address
- Buyer sends first month’s rental fee ($300)
- Seller points rig to Buyer’s mining pool account
- Escrow service observes hashrate sent to the mining pool
And when the rental term is done:
- Seller creates transaction to receive the rental fee
- Buyer signs off
If there is ever a dispute, the escrow may intervene and sign with their key:
- If the Seller defaults, the Buyer receives the Seller’s security deposit
- If the Buyer defaults, the Seller receives the Buyer’s security deposit
- If the mining rig is slow or fails, the Escrow makes a refund decision based on monitoring data
Signing a multisig transaction is a well-known workflow. For example, here is an email request via BitGo wallet to approve a transaction:
And so if the hashrate stops arriving, like with my S19’s flat-lining above, there’s no cause for alarm. The Buyer doesn’t lose their investment. Instead, the Buyer simply issues a dispute for the escrow service to sign-off on the return of the fee and security deposit. Simple.
Next steps
This model eliminates the free option for the seller to default and rug pull the buyer, which is the risk inherent with the Hosted and Cloud Mining models. Trustless Mining introduces the conditions for a safe and rewarding mining experience for bitcoiners. I hope this framework will soon allow everyone to easily — and safely — mine bitcoin.
Thanks to Nico Preti and Adam Jonas for reading earlier versions of this essay.
Want to see more?
Check out Rigly to see Trustless Mining in action.
