On the 14th of July, Dogecoin block rewards will half from 125,000 coins to 62,500 coins. This is just one of many reductions in Dogecoin’s first year of existence. Rewards are received by so called miners in return for validating new transactions. The coin started out with a random reward between 0 and 1,000,000 coins per block (or 500,000 coins on average). These rewards were later set to fixed amounts. Dogecoin will reach its final reward schedule in January 2015. Blocks will then generate just 10,000 coins per block, 50 times less than what Dogecoin started out with. In dollar value the difference is even bigger. As prices touched $0.0015 per coin, a single block would yield $750. At a rate of one block per minute on average, this results in $1,080,000 per day. 10,000 coins per block at current prices would instead yield about $3,200 per day, nearly 340 times less.
With rewards dropping this much, it raises many security concerns. Will Dogecoin be able to keep its network sufficiently large to discourage attempts at a 51 percent attack? As rewards drop, everything else remaining equal, a 51 percent attack becomes less expensive as hashrate will also drop. Miners that see their profitability getting cut significantly, or even drop below zero, will try their luck elsewhere or quit entirely. Various suggestions have been made to address these concerns, among others the suggestion of altering the mining schedule and increasing the Dogecoin inflation rate. But the real relief might come from the latest generation of Scrypt ASIC miners. KnCMiner’s 400 MH/s Titan Scrypt ASIC miner has been subject of discussion earlier, and hundreds of these and similar miners are now being unleashed on Scrypt coin networks. KnCMiner is now shipping its first batch of 2,500 Titans, valued at $25 million. This is more than 10 percent of Dogecoin’s and Litecoin’s value combined. The new generation of miners is expected to have a centralizing effect on network hashrate, which is generally seen as a bad thing as it makes the network more vulnerable.
Potential positive side effect
But for Dogecoin, this development might just buy the coin enough time to get it ready for the future. Given the efficiency of the Titan and similar ASIC miners, they can still mine Dogecoin at a profit even if daily rewards fall to $3,200. If Dogecoin’s network would, for example, purely consist of 250 of these miners, the total profit per day would be $2,300 as power consumption will be roughly $900 per day. Each miner would generate $9.20 in profits per day. The network’s hashrate would be 100 GH/s, which is even above the current hashrate of about than 95 GH/s. At such rates, setting up a 51 percent attack would remain a costly and difficult exercise. It would not be the ideal situation in terms of network distribution, but at a cost of $10,000 per miner it does not seem likely one entity will control over half of these miners. The only question remaining is why this many ASIC miners would be used to mine coins at profits this low.
The answer to this question can be found in the sheer number of ASIC miners that will be joining Scrypt coin networks. Dogecoin’s network hashrate was at around 75 GH/s just two days ago. With the order volume being so large proportionally to the Scrypt coin’s market capacity, most of the ASIC miners will not be able to earn themselves back. At $9.20 per day, this would take almost three years. Yet, at a $10,000 investment per miner, they will certainly be used as long as they can generate any profit at all to cut losses as much as possible. This makes it more likely that these miners are willing to accept very low profits, and provide relatively cheap security.