Securitizing Cryptocurrency Miner Ownership with Smart Contracts on Rootstock
Introduction
Mining is a crucial function in the Bitcoin ecosystem. Concerns abound over potential centralization of mining power into the hands of mining cartels which may or may not be benevolent oligarchs. Attempts at innovation in the mining space, though well-intentioned and, often, well executed have fallen short of incentivizing a trend toward decentralization of mining power.
Mining “contracts” and “bonds” were the first instruments used to allow investment in mining projects. Companies offering such investment opportunities set up warehouses of GPU and FPGA miners, and offered contracts at a flat rate based on hashrate offered and contract duration. Often, companies offering mining contracts would allow the investor to specify a pool toward which the mining power would be directed. Unfortunately, the hashrate avalanche that resulted from the flood of investment during this period caused many ingenuous offerings to lose production capability quickly because of Bitcoin’s rapidly increasing difficulty during this period.
As the first ASIC machines came online, the community was excited to see the advent of “cloud mining” services which make investment in cryptocurrency mining trivial for anyone who has interacted with a modern trading interface. Many entries in this space failed to perform as expected, again, due to the difficulty increases from rapid innovation occurring at this point. Still other companies claiming to offer cloud mining services disappeared seemingly overnight, taking investor funds with them. Further, most cloud mining operations don’t allow the investor to specify a mining pool in which they would like their hashrate to participate. This incentivizes a trend toward centralization, with specific cases in mind of cloud providers approaching 51% of network mining power.
Along with contracts and cloud mining, some companies offer miner hosting. With miner hosting, an investor retains ownership of the hardware and control over pool participation. The investor pays maintenance fees to the hosting provider, who is responsible for securing, powering, and maintaining the hardware. Investors can usually take delivery of their mining hardware at any time, and may then sell the miner, operate it locally, or find another hosting company for the miner. This approach, though properly incentivized, drastically reduces the liquidity of the miner as a resource, as the owner must take ownership of the hardware if he wishes to switch hosting companies or market the hardware to another investor.
The approach described in this document uses smart contracts on the Rootstock (RSK) network to commoditize ownership of mining hardware and facilitate issue of derivative instruments, based upon the hashing power of the hardware in question, as tokens.
I want this document to be read as a recommendation, or an “Invitation to discussion” if you will. Many details of implementation will require some modicum of community consensus before an approach like this can succeed.
Vocabulary
Mining Hardware - Any device or group of devices that emit shares which can be directed toward a mining pool.
Miner Hosting Provider - An individual or organization which take custody of mining hardware and operate it on behalf of an investor, collecting maintenance fees in return.
Provider Contract - A contract which performs blockchain-data management functions on behalf of a specific hosting provider. Such a contract should be considered implementation of a protocol to facilitate interoperability with other provider contracts. Implementation should begin only after adequate community discussion.
Hardware Contract - A contract issued by a provider when new mining hardware is brought online. The provider is responsible for configuring the contract to reflect ownership by an address specified by the initial investor. Again, care should be taken in implementing these contracts to maximize interoperability with related systems.
Initial Investor - An individual or organization that puts down initial investment on mining hardware.
The Provider Contract
The provider, to bootstrap his endeavor, issues a contract that holds all metadata about the operation. Contact information, number of hardware spots available (perhaps the community can come to an agreement on standard sizing of hardware) and maintenance fee information can all be enumerated in the contract, with “owner-only” accessor methods to provide update capabilities. Contracts representing hardware housed by a given provider will contain a reference to this contract so that the intrinsic “reputation” of the provider can substantiate the condition scores and other metrics the provider is responsible for maintaining. (More on these later). The establishment of a contract as the basis for reference to a hosting provider allows ownership to be passed on to other organizations (distributed or otherwise) in the future.
Equipment Purchase/Assay Process
Initial investors may either purchase equipment and have it shipped to a hosting facility, or may order hardware through the hosting provider. The provider must then assay the hardware, (much like the process for admitting large-ingot gold bars to the financial system) checking for physical as well as performance issues. During assay, the provider rates the overall condition of the hardware (new, good, poor, etc), and may test the miner’s hashrate (Though as a sign of goodwill to the investor, I recommend that any assay related mining be conducted on testnet, or that revenue be identified and perhaps loaded into the investor’s account to cover initial maintenance fees). The provider then issues a contract, sets the variable for “owner” in the contract to the address specified by their investor at time of purchase or onboarding.
Mining Pools and Protocol Enhancements
Mining pools stand to greatly benefit if a contract-focused securitization of mining power succeeds. That being said, these benefits will require some changes to the protocols that pools use to communicate to worker nodes, and APIs will need to be constructed to allow owner specification of mining pool preference. Another pool API should be architected to allow hardware owners to pay maintenance fees to their hosting provider out of pool revenue if they so choose. I also think that it might be worthwhile to investigate the idea of mining pools issuing a share-count statement whenever they discover a block. The statement would certify the percentages of work that each worker contributed to block discovery, referring to each worker by the address of its associated contract. Such certification could provide an indelible record of the performance of a piece of hardware, and enforce accountability for pool operators, hosting providers and investors alike.
Ownership Transfer
An investor may decide to sell his hardware at any time. The recent explosion of interest in DAOs have driven many centralized exchanges to support trading of tokens. Support for trading of contracts that represent mining hardware should be well within reach. Just as one must transfer tokens to an address corresponding to his account on an exchange, an investor looking to market his mining hardware need only call the ‘changeOwner’ function on the contract. Exchanges could use the metadata in the hardware contract to build a description of the equipment. Further, just as exchanges have accommodated users in execution of DAO functions through their tokens, a proxy for update/maintenance of miner information could be provided.
Tokenization of Equipment Ownership
The investor may decide to maintain some stake in the hardware when seeking to defer costs. This can be undertaken simply by creating a DAO contract and passing ownership of the hardware contract to the DAO. Details on how DAO members can then vote on changes to the miner’s pool status, request a provider transfer, or acommodate distribution of mining revenue to tokenholders are discussed at length in the DAO white paper (https://download.slock.it/public/DAO/WhitePaper.pdf) and are beyond the scope of this document.
Provider Transfer
Keeping the market for miner hosting both open and flexible is crucial to the securitization of mining power. Protocols for issuing requests for hardware transfer from one hosting provider to another will need to be designed, but these tasks can be handled through the provider and hardware contract implementations. Requests can be initiated by the owner of a piece of hardware, perhaps via a function call to the new provider. The function call could carry fees to cover shipping along with initial maintenance fees and assay service Then, the “New Provider” would send a notification of transfer to the provider in custody of the hardware in question. This method call could reference the payment they received to vouch that the transaction came from the address listed as the owner of the hardware.
A note on Interoperability vs. Competition
While it is crucial that the community develop contract interfaces which are interoperable, I see no problem at all with healthy competition between individual contract stacks. That is to say, though we may delineate standard function names and data fields, differences in the way these protocols are implemented will foster healthy growth for contract stacks across the board.
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Document: Securitizing Cryptocurrency Miner Ownership with Smart Contracts on Rootstock
Date: July 9th, 2016
Author: Gregory J. Mikeska
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