MinerUpdate interviews North American based multi-cryptocurrency mining pool Luxor Mining. The Luxor Mining founding team share their views on mining hardware, the altcoin market, and how North America fares against China in the competition for hash rate.
Luxor Mining pool is a North American-based crypto mining company that provides mining pool services for multiple cryptocurrencies. After co-founders Nick Hansen and Ethan Vera brought valuable expertise to MinerSummit in October 2019, we knew an interview needed to be lined up. As Luxor Mining is currently fundraising, it is a perfect time to get the Luxor pool team’s perspective on various crypto mining topics and how the Bitcoin mining industry will shape up moving forward. We forwarded questions to the founding team – Ethan, Nick, Eddie Wang, and Guzman Pintos– who responded with detailed answers. Given that Luxor Mining started a mining pool for altcoins, we discussed their outlook on how the altcoin market will shape up. The Luxor Mining team also shared their views on different types of mining hardware, crypto mining in China versus mining in the US, and what can be expected from Luxor mining pool given a successful fundraise.
Mining Hardware, PoW, and Mining Pool Competition
What are your views on different mining hardware – ASICs, GPUs, and FPGAs – and their impact on the health of a cryptocurrency network.
When a cryptocurrency network launches, it makes sense to create a PoW algorithm with the goal of preventing any existing ASICs from mining. Upon launching, a cryptocurrency network’s goal should be to become the heaviest chain for its mining algorithm.
In this instance, GPU mining makes a lot of sense. When a protocol is still relatively new and unknown, GPU and CPU mining is a great way to kick-off a PoW chain. Creating a unique algorithm can be achieved in different ways such as using a combination of hashing algorithms as is the case with Handshake which is a mixture of SHA3 and Blake2B. Another option is to use a variant of an existing hash function which is how Sia was able to fork off all non-Obelisk ASICs.
As the chain grows in value, it will eventually reach a point where the emission rate is high enough to justify ASICs. ASIC mining is not as bad as many GPU miners would make it out to be. Single-purpose ASICs are great for the health of the network as they better align incentives.
With GPU mining, CPU mining or FPGA mining, the mining rig can be used for other chains or other purposes such as video-rendering, AI, or gaming. ASIC mining rigs cannot be used for any other purpose. If the miner displays bad behaviour such as mining empty blocks, the community might fork the chain leaving the miner with useless hardware. This alignment of incentives keeps miners honest. GPUs have a problem with misalignment of incentives because GPU miners can act against the best interests of the network in the short-term and use the hardware for other purposes later. With ASICs, attacking a network is akin to committing seppuku – the destruction of the network also means your specialized mining rigs are effectively worthless.
Given a valuable enough chain, the end game will always be ASICs. In terms of decentralization, we are aware of a few GPU farms that would be able to 51% attack any non-ASIC PoW chain. The biggest risk with 51% attacks is that it will destroy confidence in the network’s ability to operate and the network’s value will decline to reflect this.
Decentralization simply does not exist in the GPU world. It’s not any better than ASICs, and arguably worse.
In terms of FPGAs, this hardware is generally limited given the cost and technical expertise associated. When coin emission is high enough, and no ASICs have yet to be created for the network, it may make sense to try and program an FPGA to mine a specific algorithm for a period of time. We observe FPGA activity on protocols like Monero where a scheduled hard-fork happens every 6-months. It doesn’t make sense to invest in a Monero ASIC due to the inherent risk of an impending fork. Instead, miners will invest in FPGAs to gain an efficiency advantage over CPU/GPU miners.
What about Flexible ASICs?
Flexible ASICs (FLASICs) provide a large hash rate bump over standard GPUs. Given that we think ASICs will be the ultimate conclusion for most algorithms, we find FLASICs to be another step along the CPU to ASIC ladder.
We will likely see more FLASICs enter the market as a way to reduce the forking-risk of a single coin. Rather than mining a single algorithm, FLASICs offer some flexibility in the variants of algorithms it supports. It will be interesting to see how efficient FLASIC’s become at switching between algorithms.
How does Luxor Mining feel about the energy expended by the PoW process and its impact on the environment?
Global warming is an issue and humans contribute considerable carbon to the environment. It is an issue that needs to be addressed and we are glad that many of the most innovative humans & companies are working on it. We believe in human ingenuity and think that we will solve this problem.
Crypto miners are attracted to geographic areas that are generating surplus electricity for the lowest marginal costs. Renewable energy sources, specifically hydro, are typically cheaper than fossil-fuels. That is why we see the majority of the mining ecosystem utilizing hydro energy. We also see mining operations utilizing wasted energy sources such as stranded gas. Companies like Crusoe Energy and Upstream Data have really great products that are helping the miners use stranded gas for Bitcoin mining instead of flaring or venting. In the long-run, PoW has the potential to produce more efficient global energy markets and help the development of renewables.
When considering PoW’s energy costs, it is important to consider them relative to existing governance systems. Bitcoin is a borderless and censorship-resistant currency that embodies the principles of sound money. This technology has the potential to completely shift the existing financial system for the better. The process of PoW transforms electricity into digital and decentralized gold. The Bitcoin ledger can only be immutable if it is extremely costly to produce, so the fact that PoW burns energy to secure the network is one of it’s greatest features. The existing financial system burns exponentially more energy than PoW.
There are a couple of ways Luxor pool can help the environment in the near term. The first is helping support the North American mining ecosystem. We are actively trying to assist companies in moving their operations here to utilize energy sources such as hydro and flared gas. This is countering the push of other Bitcoin mining farms moving to Kazakhstan and Iran to use predominantly coal and gas as their energy source. The second initiative is to reward Bitcoin miners for using proven renewable sources to produce their hash rate. This is still a bit far out, but we think that eventually, hash rate produced from environmentally friendly methods will be worth more than hash rate that isn’t.
On the Hashr8 podcast, Nick shared some interesting thoughts on profitability switching algorithms as a way that pools will compete for hash rate moving forward. Are there any other ways pools are going to compete for hash rate? Several mining pools we have talked with have referred to Bitcoin mining pools competing by becoming a one-stop shop for all of a miners needs such as financial services and hardware procurement.
You are correct. Mining pools are currently differentiating by offering additional services to crypto miners. Connections to ASIC resellers, colocation sites, and ASIC management software are all valuable to miners. However, we think that a lot of these services will come from third parties. For example, colocation providers are increasingly connecting with miners at conferences and through social media. The market is becoming more transparent. If a miner wants to buy ASICs or host somewhere, they can usually find a few good businesses to facilitate this.
Right now, mining pools are a black box. Every pool has their own method to calculate the PPS rate and miners generally need to trust that the mining pool is paying the right amount. Oftentimes, crypto miners will point ten mining rigs at multiple pools to compare payouts. Moving forward, we believe that mining pools can differentiate by becoming more transparent regarding pricing and payments. Luxor pool hopes to spearhead this effort.
The Altcoin Market
Ten years into the future, how do you see the entire market capitalization of altcoins faring against the market capitalization of Bitcoin?
As a disclaimer, we are heavily invested in Bitcoin. We believe it is the most secure and valuable chain that exists today. We would also bet that it continues to stay that way for the coming decades. However, we are not Bitcoin Maximalists in its truest sense. Instead, we call ourselves Bitcoin Rationalists.
We believe that Bitcoin is a religion. With any religion, there comes a time where there will be a split in one’s values and beliefs. This is why Bitcoin Cash exists. You can arguably say this is why Bitcoin Cash SV exists as well. We think that Bitcoin will dominate in market-share but there will undoubtedly be a long list of cryptocurrencies that will continue to trade against Bitcoin for a very long time.
What altcoins projects do you see as having strong staying power in the market and can capture considerable market share (>~5%) in the entire cryptocurrency market cap over the next decade, if any?
In the case that Ethereum ever drops below 5%, we don’t think any other single cryptocurrency will hold >5% market cap besides Bitcoin. As stated, we do believe Bitcoin is a religion. Like religion, there will always be a counter to the most followed religion. Even if you think BCH or BSV is a scam, there will also be people that support alternative networks and those networks will have some value given that people believe in them. We foresee a world with a few different PoW algorithms with each having a few different chains.
Any general thoughts regarding the switchover to the RandomX mining algo on Monero and how it has impacted the network?
For a bit of background, RandomX is an algorithm aimed at ASIC resistance. It is designed to be ASIC resistant by using random code execution and memory-hard techniques to prevent specialized mining hardware from dominating the network. The mining algorithm optimizes for general-purpose CPUs.
We think this will be incredibly interesting to monitor. While we don’t think that ASIC resistance is a great idea for a cryptocurrency network, we realize that this technology and ecosystem is still very new so we do appreciate experiments like this.
Although the Monero development team says that RandomX is not facilitating botnetting due to the memory requirement, we think botnetting is very feasible. Fast mode is between 4-8x faster than “light” mode but still within the same order of magnitude.
There is a large concentration of hash rate at the minexmr and supportxmr mining pools. We haven’t met many miners that use these mining pools. It is unclear to us how concentrated the actual hash rate is. It could potentially be a few large botnetters controlling a large portion of this hash rate.
Bitcoin Mining in North America Versus China
North America is gaining increasing amounts of publicity as an attractive region for crypto mining. What are the key factors which have changed over the past three years that have increased the attractiveness of North America as a region to establish crypto mining operations?
As an American based company, we are rooting for a large shift in hash rate to North America. There have been a few headlines on US crypto mining companies such as Layer1, Compute North, and Blockstream. In our view, a real shift has not happened yet. China still dominates crypto mining while Kazakhstan and Iran are also building out capacity.
Setting up a mining operation in North America is difficult. We have strict regulations, making build-out costs over 2x greater compared to other regions. We have more mature and monitored electricity grids making local government subsidies harder to negotiate. There are also no large ASIC manufacturers making it more difficult to acquire mining rigs.
That being said, we do believe in North America as a mining hub in the long-term. We are really excited to see projects like Crusoe Energy Systems, Layer1, and Upstream Data find ways to compete with the Eastern mining industry in relation to electricity prices. We also recognize that Canada and the U.S. have advanced electricity grid infrastructure that can be utilized for crypto mining.
We also see political instability as a key driver for North American adoption. Currently, the crypto mining industry is incredibly short-term focused. Setting up farms in areas of political uncertainty is still the norm. We believe as the industry matures, crypto miners will become more long-term focused and will see the value in setting up operations in places with more certainty of operation.
Many see it as a significant issue for Bitcoin that all major ASIC manufacturers are based in China. Do you share these views?
Geographic concentration is always a risk, regardless of the region. In areas of centralized government, the risk is even higher. We do see all major ASIC manufacturers being in China as a major risk.
We are looking forward to seeing the specs for SBI Carbon. It is difficult to build a mining rig so it may take a while for them to catch the current market leaders. But SBI is a respected company with a strong technical team so we are rooting for them.
Many also see a North American manufacturer as the last piece of the puzzle for the crypto mining industry in America. If a large North American Bitcoin ASIC manufacturer were to arise, how do you foresee the shares of hash rate in China and North America responding?
We see two puzzle pieces missing for North American crypto mining development.
Having a local Bitcoin ASIC manufacturer is essential to the growth of hash rate. Historically, North American miners have got their hands on mining rigs last. The mining rigs North American miners acquire have either already been used to mine or Chinese miners have already been using the latest-gen mining rigs for a few weeks. As we know, the first few weeks of mining is always the most profitable given the difficulty adjustments.
The second piece is regarding the financial instruments to hedge risk. Miners inherently take a long position on hash rate. Given that crypto miners invest millions in capital expenditure, they are exposed to the volatility of the value of their hash rate. The lack of financial instruments incentivises mining farms to take short-term positions on build-out and deployment. Many institutions that want to get into mining in North America cannot cut these corners due to regulation. Once we get the proper tools to help sophisticated miners hedge their hash rate risk, we will see larger deployment in North America.
We are bullish on North America mining. North America has great energy sources and infrastructure here. It is what is needed for the industry and we are excited to help it develop.
How can a North American manufacturer of ASICs ever compete with a China-based manufacturer given that China is in close proximity to the electronic components required and also has access to lower labor rates? What is needed for a major North American Bitcoin ASIC manufacturer to succeed?
Most tech hardware companies have parts of their supply chain in multiple countries. An American ASIC manufacturer does not need to source every component here. The key is that the final machine is assembled in North America. This will allow the North American miners to get the machines first, avoid tariffs, and to be able to negotiate better prices. A partnership with a Chinese company would even be a step in the right direction.
A low-cost chip manufacturer in North America would still be a game-changer. If anyone knows a guy at Qualcomm, start shilling.
Luxor Mining Moving Forward
Luxor Mining launched its Bitcoin mining pool in October. How has the battle to acquire hash rate been going?
The launch of our Bitcoin pool was mostly a result of our interest in the technical aspect of mining BTC. It was our first shot at SHA-256 and we are thrilled at how it has gone from a technical perspective. We have mined six blocks since launch.
From a business perspective, this hasn’t been our primary focus. We are working on other products that we think are more valuable to the crypto mining community. We believe these products will really help the crypto mining industry mature and become more transparent. In Q2, we are aiming to partner with North American miners to bring back hash rate to North America.
Luxor Mining is completing a fundraising round? Can you share any details on how it is going?
There are not too many details to share at this time. We are raising our Seed Round and have been talking with a number of VCs and crypto mining companies. We are excited to partner with new players that will help us transform the crypto mining ecosystem.
Given a successful fundraising round, are there any exciting projects that we can expect from Luxor?
Yes, stay tuned! We believe the crypto mining industry is lacking a few key essentials. After the raise, we will be working to make the mining industry more transparent and building products that will allow crypto miners to be more long-term focused.
Luxor Mining Interview Summary
Thanks to the Luxor Mining team for taking the time to participate in this MinerUpdate interview. We will be keeping in touch with the Luxor mining team to see how their fundraise goes. We will also be looking forward to having a more detailed discussion regarding their new projects.
