Death spiral theory subscribers argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral. That is, without the mining activities supporting the ledger that maintains the records of who owns what.
Corey Miller, part of the BlockTower investment team, raised an interesting question apro po the topic of death spirals. While everyone was focused on the baseless bitcoin mining death spiral, EOS price crumbling got its block producers in hot water.
Cory wrote on Twitter:
In this survey filled out by block producers, the break-even cost for them was ~$4 per EOS. EOS is currently trading at $1.80.
The survey he is quoting is this one, done by altShiftDev, company that developed one of the EOS wallets. The article accompanying the survey states that “The EOS Mainnet grows at a rate of 5% per year, 4% of that is locked away in the Worker Proposal Fund — an untouched account (eosio.saving) currently holding 18.5m EOS established to fund upgrades to the network.
Teams were asked at which price-point they fall into the following categories (in order): Break-Even, Cuts to Development and Community Projects, Major Layoffs and Bankruptcy. They were asked to assume a stable price of EOS for at least 3 months.
- The average breakeven price-point across my dataset was $4.14.
When asked at what price they would likely have to make major cuts to community projects and open source development, the average across all tiers was $3.67.
The average price across all Tiers at which major layoffs would have to be made is $3.08.
- The average team size across all tiers was 6.85 members with T1 teams leading the group with an average team size of 8.63 members.
- The average T1 team (of EOS BPs) spends $925,625.00/year
Given there is no difficulty adjustment mechanism in EOS, BPs are going to be forced to either downsize their operations/cut costs or, in some cases, completely shut down.It seems that we are actually starting to see the latter play out here. Of the top 81 BPs (who are the only ones who receive rewards) ~10% are currently turned off. More specifically, there are quite literally getting free rewards for doing nothing.
Unless EOS price rebounds substantially, I think we are going to see more BPs shut down. The other option is to increase BP rewards (could adjust dynamically based off of EOS price).
EOS block producers explained
EOS focues blog, EOStribe explains block producers role as follows:
“The annual inflation [in EOS network] is 5%, but as times goes on and the EOS tokens are worth more, the token holders can vote on decreasing or increasing the inflation rate.
The inflation rate is split up into different pools because maintaining the blockchain includes Block Producers (BPs), who run the network, and worker proposals for improving the blockchain. The inflation is split up between those two groups with BPs earning 1% and worker proposals with 4%. Worker proposals are presented to the community and token holders vote on what improvements to make.
The BP funds are split up differently to maintain higher value for those most trusted in the community and whom runs one of the active twenty one BPs.
As written in the code, 25% of the BP pay goes to active producers and 75% goes to standby BPs calculated from a percentage of the votes received. 318 EOS tokens are awarded to the 21 active BPs per day. 200 EOS per percentage of the vote per day are awarded to all standby BPs.”
Bitcoin mining death spiral rebuffed
Arjin Balaji of TheBlock exceptional explanation of this:
Prior to proclaiming Bitcoin’s demise due to the death spiral, it’s important to understand a few common misconceptions about miners and their relationship with the difficulty adjustment:
- The “break-even cost of mining” is much lower for many miners than is often quoted by analysts (who focus on the average miner). Many of the most profitable miners have a “cost per Bitcoin” (opex + capex) that asymptotically approaches 0. This is the combined result of heavily-subsidized electricity (often free or even negative-cost) and extremely low cost of ASICs for the largest miners, who are often vertically integrated or receive favorable deals from hardware manufacturers.
- Similar to producers in other markets (e.g., traditional commodities), miners have a set of constraints that may rationally force them to mine at a loss — this is a situation accounted for by miners. These constraints include long-term power purchase agreements, hardware purchase agreements, facility leases, and other financial arrangements. With these constraints and strategically-planned cash reserves, miners can mine at a loss for an extended period.
- Contrary to mining other commodities, where mining at a loss results in sustained price suppression (due to increased supply in the market), rational miners want to mine Bitcoin to accelerate the time to the next difficulty adjustment (which more accurately reflects the “real” difficulty of mining). The miners that endure a crypto “bear market” are at a massive competitive advantage, as we saw with miner consolidation in the last market cycle.
Additionally, what death spiral crew obviously was not familiar with is one ingenious feature Satoshi Nakamoto built into the bitcoin mining design. And that feature is difficulty adjustment. Thanks to this stroke of genius baked into its fundamental design, every time a mining rig is shut down, the bitcoin protocol increases the incentive for other miners to stay online.
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