Understanding Economies of Scale

Economies of scale are an important concept in Proof of Work (PoW) mining. Economies of scale are defined as “the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.” All participants in a PoW mining network are competing for the same block rewards, and these rewards are on average equal to the proportion of network hashrate owned. Profitability is therefore mainly dependent on efficiency, and economies of scale dictate efficiency (profitability) must be greater if the scale of the operation is bigger.

Case

For example, consider Dogecoin with a total network hashrate of 75 GH/s. The current reward per block is 125,000 coins. The average time to solve a block is one minute, meaning 180 million new coins will be generated per day. At a price of $0.000223 per coin, this has a total value of $40,140. Let’s assume the following small scale miners are present in the network:

Specs

Assuming an electricity rate of $0.15 per KWh, and a stable hashrate, the miners will produce the following profits per day:

Profitability

In this case, the GPU miner is already operating at a loss. The ASIC miner is a lot more efficient, using nearly 22 times less energy per KH/s. But now let’s assume the network is joined by a single Titan ASIC miner by KnCMiner. The specifications are given below:

Specs

The network hashrate will go up by 400 MH/s, and the ASIC miners will then generate the profits underneath:

Profitability

Centralizing effect

It can be seen that the small scale ASIC miner is less efficient, and its profitability has also dropped by a tiny amount. The Titan requires 8 times less energy per MH/s. KnCMiner wanted to sell 2,500 of these Titan miners for their first batch, these miners are now starting to arrive. Assuming that just 10 percent of this single batch by KnCMiner alone would join the Dogecoin network, this would still come down to 250 ASIC miners. Combined, the hashrate of these 250 miners would be 100 GH/s. The total network hashrate would become 175 GH/s, and the profitability for all miners would decrease as below:

Profitability

Obviously, more Titan ASIC miners in the network mean that the profitability for each miner will go down. But overall, the drop in profitability for Titan ASIC miners is limited, and the small scale ASIC miner takes the biggest hit. Its profitability goes down by almost 20 percent, compared to just a little over two percent for all the Titan ASIC miners. This is how large numbers of small scale miners eventually get squeezed out of the market, leaving only a smaller number of large scale miners. In other words, economies of scale have a centralizing effect on the network hashrate.

Reduction in block rewards

As Dogecoin block rewards are about to half in just several days, it can be shown that this will impact small scale miners the hardest. Given stable prices, the total dollar value of new coins per day will drop to $20,070. Combined with the previous scenario of 250Titan miners joining the network, the small scale ASIC miner will lose another 30 percent in profitability.

Profitability

The reward halving would affect the Titan miners as well, yet the loss in profitability would be limited to just four percent. The calculations above did not include mining pool fees, but in general bigger pools should be able to run with a lower fee structure. Also it should be realized that a single entity with multiple Titan miners could save on power costs. But even without this, the effect of a larger scale should become apparent from the discussed examples.

Conclusion

Less efficient (small scale) miners will be pushed aside by the more efficient (large scale) Titan (and similar) ASIC miners. As shown, the Tri-Gridseed USB ASIC Miner quickly drops in profitability as more Titans join the network. The main reason for this is that the energy costs for a Titan miner are divided over relatively more hashing power. The Titan ASIC Miner requires 8 times less energy per MH/s than the Tri-Gridseed USB ASIC Miner. The effect the Titans have on each other is limited. Eventually, the profitability of the Tri-Gridseed USB ASIC Miner will drop below zero and subsequently disappear from the network. It can be calculated that this will happen if 510 Titan ASIC miners join the Dogecoin network (after the halving). This corresponds to 20 percent of only the first batch by KnCMiner and is therefore not unrealistic. At this point, the profitability of the Titan miners would still be at 87.49 percent each.

As a single Titan can replace almost 300 Tri-Gridseed USB ASIC Miners, the entire network will end up with a smaller number of miners in total. Economies of scale thus have a centralizing effect on the network hashrate. This is further amplified by reductions in block reward, as these put a bigger strain (relatively) on less efficient miners.

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