Cloudmining: The Bane or Blessing of Bitcoin? (Op-Ed)

With the promise of the moon for its users without the need to purchase expensive mining equipment, the cloudmining industry has been experiencing its ups, and recently, its downs. While the ostensible scams and pyramid schemes in the cryptocurrency space are damaging and ultimately bad for Bitcoin, the concept of mining “in the cloud” can be beneficial to the long-term growth of the ecosystem.

What is Cloudmining?

Put simply, cloudmining is when you buy processing power that is generated at remote data centers.

Many users have opted to mine “remotely” in this way since it offers no additional electricity costs, no need to purchase equipment (which may quickly become obsolete), no equipment cooling issues, no waiting for equipment delivery, not to mention a quieter home without any humming fans.

On the flipside, admittedly there is significant risk of fraud, reduced transparency, lower profits, possibility of operation suspension by the service provider, as well as the general lack of control and flexibility from not owning your own equipment.

There are three types of cloudmining which include equipment leasing of a miner machine hosted by the provider, virtual hosted mining where you can create a VPS and install your own mining software, and finally the leasing of hashing power without having a dedicated physical or virtual computer, the most popular method among users.

Failure is necessary

For the most part, the general public currently views the cryptocurrency market as ridden with Ponzi schemes, cyber theft, fraud and a whole lot of risk, which can be daunting and overwhelming, particularly if you are a beginner. What's more is that this perception is often reinforced when a Bitcoin startup gets “goxed,” disappears or suspends its operations.

But “failure is necessary for success” as the popular saying goes, and this could be very timely applied to the cloudmining industry. The failure of less competitive and particularly incompetent businesses under free market conditions could be very beneficial for the long-term development of a healthy Bitcoin ecosystem, which ironically, might be considered to be currently “protected” by its lack of regulation since it is not subject to the possibility of bail-outs, bail-ins and government interference.

For instance, several cryptocurrency companies, particularly those involved in cloudmining, have announced the suspension of their operations given the relatively low price of Bitcoin in recent months, which has negatively impacted their bottom line. This, in turn, has forced many of the Bitcoin startups to tighten their belts, cut expenses, and slash fees in an attempt to become more competitive. 

“Everybody is looking for cheap electricity and easier cooling,” said CEX.io CIO, Jeffrey Smith, in an interview with Cointelegraph back in January. “The company which has the best conditions will have a big advantage over other companies.”

But despite possible failure under volatile market conditions, new Bitcoin and cryptocurrency-related businesses will always increase the sheer computational power and the number of users on the given network, increasing its value à la Metcalfe’s Law, as the capital influx grows the market cap.

For example, a launch of a cloudmining startup guarantees the increase of:

Users; Capital; Processing power/ transactions.

The latter is especially important for the network as additional computational power used to validate transactions will make the network more secure. Jon Matonis, Founding Board Director at the Bitcoin Foundation, explained to Cointelegraph:

"[Cloudmining] businesses can be helpful to the bitcoin ecosystem because ultimately they support the security and resiliency of the blockchain with increased computational power."

Additionally, other users and businesses within the space will not only learn from these mistakes but will also be incentivized to innovate by creating new technology (e.g. eco-friendly mining equipment etc.) and services that will make the ecosystem more resistant, stable and robust over time.

Reputation and trust

Cloudmining allows users to not only mine Bitcoin but also to also secure the network without the need to purchase expensive equipment. However, “since it is centralized and involves trust, cloud-based mining and any pooled mining will be a business largely based on reputation,” adds Matonis.

Certainly, the practice of cloudmining can be considered to be antithetical to the ethos of Bitcoin as it is centralized and involves trust. Trust is especially important for conducting business, particularly in an industry which is notorious for scams and the possibility of “fractional reserve mining,” an issue that was raised by Bitcoin developer, Gavin Andresen last year.

“There is no way for any mining company to prove that they really own the hardware,” said Marco Streng, CEO of Genesis Mining. “We do our best to be as transparent as possible […].”

Without any real way for cloudmining service providers to prove they own the hardware, the development of tools that address the issue of transparency and trust on a “trustless” network has necessitated the development of such tools as multi-signature and Yelp-type reputation or rating systems (e.g. Bitrated, Bonafide or the one proposed for OpenBazaar) to boost user confidence and weed out the bad actors. Such a system is certainly needed and the first attempts can be seen here, here and here. 

 “A reputation service for Bitcoin is both necessary and progress,” says Mike Lorrey, Galactic Systems, Inc. president. “Creating private arbitrators through the transaction smart contract is part of the promise of cryptocurrency…”

With its questionable players, the cloudmining industry will not only be one of the primary drivers in establishing such a reputation system, but will also benefit from it as users will prefer to pick their service provider based on other users’ reviews instead of sleek ads and marketing campaigns.

Conclusion

Jeffrey Smith told us that the cutoff price for miners to becomes profitable is somewhere around US$320. But under current suppressed market price conditions, cloudmining firms will be forced to either innovate or break under the market forces and competition, which may be ultimately beneficial and something that has been lacking in the traditional economy due to government intervention.

Cloudmining, in itself, is not damaging for cryptocurrency as a whole and in fact provides the blockchain network with additional mining capacity, capital and users that wouldn’t otherwise exist. As more and more people become involved in cryptocurrency, cloudmining will continue to offer an easy way for people to mine remotely, as the industry itself becomes increasingly reputable, transparent and more accountable before its users.

We would love to find out what you think. What is the role of cloudmining companies in the cryptocurrency community? You can share your opinion in the online poll here.

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