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Bitcoin Mining: A New Means of Paying for Video Games?

Recently, a new Bitcoin startup called Coinlab attracted considerable attention from the community, raising $500,000 startup capital from Silicon Valley angel investors. Operating under the tagline “All your gamers are gold”, what the startup intends to do is to help game companies monetize “that 80% in the middle” – those users who have a significant commitment to the game but not enough of one to buy a monthly subscription or spend heavily on virtual goods. Of course, the method that they intend to employ is Bitcoin mining.

The idea of Bitcoin mining as a means of paying for software is nothing new. About a year ago, Javascript miners attracted considerable buzz as some proclaimed that background browser mining could even replace Adsense as a means of web content monetization. However, that project never got off the ground, and its creator quickly gave up, explaining that “Javascript is just too slow to mine bitcoins. The recent difficulty increases have made this an impractical idea.” This was predictable; since Javascript only has access to a computer’s CPU, and not its much more powerful GPU, now that GPU mining has become mainstream it will never again yield significant profits. Coinlab, however, is much more optimistic. According to their calculations, “the average gamer will generate 50 cents to $2 per day for the game companies by making that computing power available, working out to more than $15 per gamer per month.” According to this estimate, a non-paying customer of a game using Coinlab’s service would generate more revenue than a paying customer for a conventional MMORPG like World of Warcraft.

On the surface, the estimate is sound. Assuming that a computer has 300 MH/s (a reasonable estimate, judging by an informal poll taken last summer), since the mining factor (USD per day per 100 MH/s) is currently about $0.33, a gamer running Coinlab’s background software might be able to earn the company $30 per month. However, there are serious problems with this estimate as it is.

First of all, the business model is not scalable. At a price of $5, Bitcoin mining generates a total of $36000 per day, or $13 million per year, for all miners no matter how many there are, and this figure will fall to $6.5 million per year by the time Coinlab gains substantial momentum due to the upcoming mining reward change in December (although an argument can be made that the change will simultaneously increase the Bitcoin price, undoing some of this loss). If Bitcoin mining is to become the source for even 0.01% of the $65 billion per year video game industry’s revenue, the number of gamers the industry needs to attract to grab each additional dollar would in the worst case scenario approach infinity – in order to capture 90% of the pie, you need to have enough hash power to match 900% of the size of the pie as it currently is (an equilibrium at which each individual user would be generating a mere $3 per month rather than $30), and capturing 100% of the pie or more is impossible. One reply to this is that the size of the Bitcoin economy, and therefore the Bitcoin price, will increase, but even as this happens the mining reward will continue to fall, so it is unlikely that mining revenue will ever exceed a few billion dollars per year even if it Bitcoin does become a significant global currency.

Secondly, the assumption that gamers will be playing on computers that are running 24 hours a day is unlikely to last. Desktop computer sales are on an irreversible decline, and by 2015 the overwhelming majority of users will be on a combination of notebooks, netbooks and tablets. Most worrying of all, it is the computationally weakest category of them all, tablets, that are overtaking the desktop, as the middle categories are remaining constant. Laptops, netbooks and tablets are much weaker than desktops in terms of GPU hash rate, and even the hash power that they do have often cannot be used. Suspend and hibernate mean that they are off for a significant portion of each day, and Bitcoin mining on a computer that is not connected to a power source will quickly drain the battery, which will lead many portable users to reject the software.

Finally, the viability of mining on general-purpose hardware is at the same time threatened from the other direction: that of specialized mining chips. The era of CPU mining is long over and even GPU mining is now entering its twilight as customized hardware like FPGA takes over and custom-built ASIC (that’s application-specific integrated circuits, chips designed for the sole purpose of mining) looms over the horizon, threatening to make all lower-grade mining technologies obsolete. In a year’s time, mining on general purpose hardware is doomed to suffer the same fate that Javascript mining did before it was born.

While Bitcoin mining may make software developers some small change in the near term, it is ultimately not only useless for this purpose but highly environmentally irresponsible. If the business model is to survive longer than a year at all, it will be by deception, relying on users’ ignorance of the cost that they are paying for the electricity that the mining software is consuming overnight. The Bitcoin network, already criticized for what many see as a waste of electricity, would become even more so, spending perhaps an extra $50 million per year mining on inefficient hardware only to increase the investment required by an attacker to overpower the network by a mere $1 million. If we are to be paying for our games with bitcoin, perhaps we should work on developing a microtransaction-friendly Bitcoin economy and helping users buy bitcoins quickly and easily so that they can buy the games directly.

 

BTC: 1FxkfJQLJTXpW6QmxGT6oF43ZH959ns8Cq

LTC: LaBhvWiAP7msku6w8QSQ5G7omVWMF3uxJC

By

Vitalik Buterin is a co-founder of Bitcoin Magazine who has been involved in the Bitcoin community since 2011, and has contributed to Bitcoin both as a writer and the developer of a fork of bitcoinjs-lib, pybitcointools and multisig.info, as well as one of the developers behind Egora. Now, Vitalik's primary job is as the main developer of Ethereum, a project which intends to create a next-generation smart contract and decentralized application platform that allows people to create any kind of decentralized application on top of a blockchain that can be imagined.

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  • http://blogs.forbes.com/jonmatonis/ Jon Matonis

    You make three good points. However, I don’t think this is a play for a % of gaming revenue, it’s a play for scalable dominance in the bitcoin mining/transaction sphere. I have maintained that CoinLab will probably have to open this up to non-gaming participants in the mining pool which is when it gets interesting.

    As bitcoin exchange price escalates and greater transactions depend on the network, the potential revenue from mining/auditing is not capped. I am confident that the transaction fee issue will sort itself out. It may be a zero-sum game on the number of mined/audited blocks in the block chain but the potential revenue number is unbounded. Aggregators like Deepbit will gain in importance.

    • Joe

      possibility of “scalable dominance” is rather questionable once hardware with two orders of magnitude better power efficiency comes on-line in quantity

    • Fred

       “As bitcoin exchange price escalates” – I can’t help thinking that is the important point. Invest $500,000 in a Bitcoin startup that has a foot in the door to a vast potential market for bitcoin and watch as your bitcoins increase in value 100 fold as they roll out more bitcoin related services for the gaming world.
      That’s where the revenue is – not the mining.  The mining is just the first step – the point of entry.

  • Peter Vessenes

    We’re much more bullish on this plan than you are Vitalik, for a variety of reasons; partly our economic model is much different than you describe, and partly because we have some different opinions about both energy usage and bitcoin economics.

    Why don’t you drop me a line for an interview, and we can discuss our different perspectives?
    One major difference in our plan than what you describe is that we will be allowing gamers to monetize their GPU when they are NOT playing the game. It would be silly to add strain to a computer WHILE a gamer plays their favorite game.At any rate, a full rebuttal to your complaints would be interesting to your readers, I think. I’ll look forward to chatting.

    • Vitalik Buterin

      > One major difference in our plan than what you describe is that we will be allowing gamers to monetize their GPU when they are NOT playing the game.

      I understood that. The calculations I started from assumed that you’ll be exploiting gamers’ machines 24 hours per day, and the whole point of the second part of my argument was that you’re never going to get anything close to that kind of uptime due to suspend/hibernate and battery considerations.

      If you want to talk more, you can always email me or add vbuterins on Skype. I’d be happy to be proven wrong on this one.

  • http://twitter.com/sgornick Stephen Gornick

    Environmentally irresponsible?  Didja know that data from the City of New York shows that just one certain B of A building in NYC consumes about as much electricity (6.5 MW) than does all of the bitcoin mining occurring globally?

     – https://bitcointalk.org/index.php?topic=75151.msg833144#msg833144

    ~7.1 MW for Bitcoin at 1577913 difficulty:

    – https://docs.google.com/spreadsheet/ccc?key=0AmcTCtjBoRWUdHVRMHpqWUJValI1RlZiaEtCT1RrQmc&authkey=CMrV-rYE#gid=0

    • Vitalik Buterin

      I do not believe that Bitcoin mining is environmentally irresponsible in general; I in fact argued quite the opposite in my article here: http://bitcoinmagazine.net/the-wasted-electricity-objection-to-bitcoin/ . What is irresponsible is deliberately mining on highly suboptimal hardware. Since you’ll be mining on everyday GPUs rather than the specially designed chips that everyone else will be on in a couple of years, the electricity cost spent on mining will drastically exceed the revenue that you receive, and the only way such a situation can possibly exist is due to the fact that (most) users don’t have access to an itemized list of just how many dollars of electricity everything costs. We have to mine, but we should mine in ways that make sense.

      • http://twitter.com/sgornick Stephen Gornick

        So let’s say I have a Toyota Corolla and you have a GMC Suburban.  We both use the vehicles mostly for the commute of roughly the same distance to work.  You should sell your vehicle because you are being irresponsible.

      • http://blogs.forbes.com/jonmatonis/ Jon Matonis

        It would be anti-free market to set some minimum parameters for acceptable efficiency of mining. The market will decide ultimately and if game companies want to take the risk of alienating their customers’ families, then that is their choice.

        Cryptographer Ben Laurie also makes the point about efficiency on a global protocol level, but sometimes it’s not always about efficiency. See my comment to Ben’s thesis here: http://www.links.org/?p=1183#comment-488956

        • Vitalik Buterin

          > It would be anti-free market to set some minimum parameters for acceptable efficiency of mining.

          Except that this service isn’t a normal, honest free market offer. It will quickly end up consuming more electricity costs for the customer than it generates in profits, so the only people that will go for it are those who do not realize how much electricity they’re spending and how much it costs and people who have free electricity (from employers, schools, some landlords, etc). Of course the market will ultimately unravel this deception for what it is, I’m not trying to go against the market here – I’m just revealing things for what they are to make the process go faster.

          • Dusty

             > Except that this service isn’t a normal, honest free market offer
            Yes, it’s a very normal free market offer.

            Also, if it’s clearly indicated that a certain game is using your GPU for other purposes it’s also very honest.

            A complete offer to play the game could let the player decide if using the GPU or pay for it.

          • Vitalik Buterin

            What are the possible situations where consumers would voluntarily accept this? I can think of 4:

            1. The electricity cost is less than the money that is being generated for the company. This is the use case that everyone wants to dominate, but I argued in my article that such a situation is not going to last long.
            2. The consumer is not paying the electricity cost, because his electricity is paid for by a school, workplace or landlord. This is a problem with Bitcoin mining in general, so the fact that Bitcoins are being mined by gamers rather than professional miners doesn’t make things worse here.
            3. The consumer does not realize how much the electricity costs. This is the one that I think will dominate. This service will be marketed to casual gamers who have no interest in the technical aspects or economics of Bitcoin mining and will likely not understand just how much power their GPU consumes. If this situation does indeed dominate, then the likely fate of this service will be a couple of articles in the mainstream tech news advising everyone not to fall for this, followed by obscurity for Coinlab and yet more ammo for those who deride Bitcoin as a scam – that’s what I’m scared of.
            4. The mining is inefficient (electricity cost > revenue), but it’s less inefficient than any other means of payment due to transaction costs. Paying with a credit card takes extra time and effort (or is not an option at all, as in the case of children/teenagers) while “paying” by using more electricity is automatic.

            If this service will have any legitimacy at all it will be because of #4, but I think that the reasons I outlined in the article will shoot up mining difficulty and therefore inefficiency to the point that even the weaker requirement of being less inefficient than anything else will eventually become impractical. And even if it does somehow manage to overcome the problems it’s a highly suboptimal solution – as I finished my article, “If we are to be paying for our games with bitcoin, perhaps we should work on developing a microtransaction-friendly Bitcoin economy and helping users buy bitcoins quickly and easily so that they can buy the games directly.”

    • http://googleplus.VoluntaryMan.com/ William Thieme

      These numbers must be off though, considering the fairly recent explosion of FPGA mining and the efficiency boost that brings.

  • David Sterry

    Mining continues to be one of the most democratic and anonymous ways to obtain BTC. Kudos to CoinLab for recognizing this and for their efforts to, if not get in directly into users hands, show that it can be used to earn value. Now if they could just get some ASICs produced and into some of their future customer’s hands…

  • serge

    The more bitcoin transaction take place the more computerizing power is needed.The problem is that miner(offer) rise faster than real bitcoin transaction(demand).This bitcoin mining industry is just a big race for the best mining gear and the hardware you invest in now may be uncompetitive in 2 year, barely giving you back your invested capital and ending up with hardware that worth like 2/10 of its initial value.Not to mention those crazy poeple with amazing hardware are likely to push your gamers out of the pool!How much a 3 ati 5870 setup gear will worth in few weeks when the little 149$ butterfly who beat that by 4 time become available?At the actual difficulty and bitcoin price(20$) 4,5 ghash/s give you between 0.75 and 1.25 bitcoin/day from mining pool but who know if in 2 week the difficulty will not double and price crashing by half?