Tuesday, May 19, 2015

21 -- Part 2

My thinking on 21 has evolved a little bit over the first 24 hours. I'm going to lay out three scenarios for how I see the possibilities here.

First, to recap -

  1. 21 has built a single-core mining ASIC that can be embedded in any electronic or home appliance. So if your mobile phone is plugged in, fully charged, and on Wifi, it can do some hashing and contribute to a virtual mining pool operated by 21 (I'm assuming they have the sense to not run mining operations while you're out and about, killing battery life and using up your data). This will produce a small stream of Satoshis for the device's use. 
  2. The 21 Chip's mining process would be most cost-efficient in appliances that need to generate heat anyway, such as slow-cookers or washing machines. The chip can just be part of the heating element. But would Satoshis in your rice cooker be useful? I would think they'd be most useful in interactive devices such as your phone, tablet, home PC, or smart TV, so the economics are worse.
  3. The 21 Chip's mining process will never be as efficient as running your own (or hosted) mining rig in a low-cost electricity market, because of revenue splitting and local variance in the cost of electricity. Essentially you're spending $4 in electricity to get $1 in BTC. The $3 is the "cost" of having automatic, embedded Bitcoin in all of your devices. Convenience over frugality.
  4. Revenue splitting isn't just between the user and 21, but also allows for payments to be made to the manufacturer the chip is in, as well as the distribution channel. 21 specifically mentions the ability for retailers or mobile carriers to configure the 21 Chips they sell such that they earn BTC over time from a user's mining activity. The actual revenue split isn't disclosed. Does 21 guarantee a minimum share of income to the end-user? That's not clear.
  5. There is the possibility that devices will be able to use their Satoshis for authentication and identification. Of all the features mentioned in the 21's blog post, this is the only one that promises any real value to consumers.
The confusing part of their blog post announcement is that there are a number of statements made which stand directly at odds with each other. For instance, they go on at length about subsidized devices and making payments to channel partners, but then say this:
Well, at 21 we are less concerned with bitcoin as a financial instrument and more interested in bitcoin as a protocol
And this:
Crucial to this is the idea that bitcoin generated by embedded mining is more convenient — and hence more valuable — than bitcoin bought at market price and manually moved over to the site of utility.
These statements seem to concede my point #3 above, which is that the BTC generated by these devices will be peanuts-small and obscenely expensive compared to just running a mining rig. How much can a mobile carrier really make off of a cheap smartphone in the developing world? A couple dollars per year, at most? That's hardly enough to meaningfully defray the costs of a new electronic device.

I take them at their word that they consider BTC more useful as a protocol than as a financial instrument. Especially at the Satoshi price level! But what to make of all the space they spend on making arguments about payment streams or making micro-payments for things? Would the average user even care about the ability to buy, mayyyybe, one free song per month from their mining rewards? I have my doubts.

Meanwhile, this quote indicates a deeper purpose, about changing the basic fabric of computing:
Conceptually, we believe that embedded mining will ultimately establish bitcoin as a fundamental system resource on par with CPU, bandwidth, hard drive space, and RAM.
Towards that end, our team of PhDs in EE from MIT, Stanford, and CMU has built not just a chip, but a full technology stack around the chip — including reference devices, datasheets, a cloud backend, and software protocols.
So here's what I think: I think we are looking at a classic bait & switch, but I'm not sure yet whether the intended patsy is the consumer or the manufacturing sector. Which one it will determine whether 21 is a "good" company or an "evil" one.

Subsidies, Revenue Sharing. This is the bait. Manufacturing electronics is a famously low-margin business. Margins on RAM or chips are razor-thin, and the ability to eek out even another 1% of margin will be leapt at. The sales pitch here is easy for getting the chip included in devices. "Hey, manufacturers, how would you like to earn a perpetual revenue stream from your devices?" It's almost free money to them.

With fast manufacturer and distribution uptake, consumers will end up with devices with this functionality whether they want it or not. It'll just be there, and the revenue splitting will be done by 21 (not the device). Even if there are ways for consumers to turn it off or modify the functionality (likely requiring jail-breaking the device), most won't.

Meanwhile consumers will see higher electric bills, but probably not so much higher they'll really care. They'll just see a status indicator that they have 50 Satoshis in their wallet, or whatever.

Priming the Pump: With fast manufacturer and distribution inclusion, and a 2-3 year upgrade cycle in mobile phones, we could have 21 BitShare chips in every mobile device in the world within a couple years. This lays the groundwork for massive developer support of the new features this allows.

However, for that to happen, 21 needs to protect the consumer's revenue split from greedy manufactures and distributors. If the manufacturer can take 100% of the Satoshis that aren't taken by 21, then the end-user gets nothing, and the potential for having automatic BTC just magically appear in their hardware wallet evaporates.

This leads to three scenarios:

21 sees the opportunity to be the "AOL CD" of Bitcoin. Back in the 1990s average folks didn't know what the Internet was, or what it was for, or why they needed it, and it was hard for AOL to market their product, so their solution was to rain down Biblical plagues worth of free trial CDs on the people. Literally everyone in America ended up with a free trial CD (or a dozen of them) whether they wanted one or not, and a number of them put it into their computer on a "Why the hell not?" basis.

This could be a similar situation. Because of the financial incentive to manufacturers to include the 21 BitShare chip in every device, the public gets BTC on their mobile devices whether they want any or not. And each week or month a few of them will start using them on the same "Why not?" basis. This strategy is about getting BTC in front of as many people as possible to bootstrap Bitcoin to being the global financial protocol its boosters claim it's capable of being.

This scenario accepts that people won't voluntarily buy phones with BTC and load them up with Satoshis, mostly due to a lack of consumer education, but believes that the value is there if they can just get people to use it. Obviously this depends on the authentication and smart contract value of having a few Satoshis on hand actually being valuable to consumers. Because if it isn't, all they get is costs.

21 sees the opportunity to control a very large mining pool, and they're offering a cut of those profits to all manufacturers and distribution channels, and getting unsuspecting consumers to pay for it with "free" electricity. This way 21 can undercut the mining cost structure of all the other professional miners who have an electric bill they need to pay.

Consumers get a slightly cheaper device (maybe), but there's no minimum reward-split for the end-user; all they get out of this scenario is slightly higher electric bills. The smart contracts features never appear, or they appear but the manufacturer takes 100% of the BTC earned, so the end-user never has any BTC to sign smart contracts with. There's no benefit to end-users here. It's hoped by 21 that the electric bill cost bump will be low enough to be a "tolerable annoyance", rather than something painful enough for consumers to revolt over.

This scenario recognizes that both the GOOD and EVIL scenarios are real, but the EVIL scenario is seen as an intermediate stage to a future where consumers become educated about Bitcoins, want Bitcoins, and demand devices that share the majority of their mining rewards with the end-user, and not the distribution channel or even with 21. Also the mining chip eventually takes a back seat to the real feature that allows IoT commerce - hardware wallets in everything.

This scenario also contemplates that 21 won't be able to stamp out all other miners, so we don't have to worry about a 51% attack in the network. If the strategy is successful, competitors will appear en masse. It's not like ASIC mining chips are hard to design. Compared to a CPU or GPU, they're dirt simple. Some Chinese firms will reverse engineer the features necessary to work with whatever standards 21 has developed, and will sell those chips at a pittance. The mining pools will be as fragmented as the companies selling these chips. The share of revenue going to the chip companies will be driven down to the minimum viable margin, and it only remains to be seen whether the lion's share of the rewards go to the distributors or the end-users. Ultimately we end up in a place where every device in the world contributes a little hashing power to securing the network, and a 51% attack is physically impossible even by adversaries as well funded as the US or Chinese governments.

Heck if I know. Frankly, reading the launch blog post by the CEO of the company, I can't help but be dismayed by how poorly written it is and how many logical inconsistencies it contains. It's a very bad start, and suggests either that they're really disorganized and have no idea what they're doing, or are actively trying to deceive people. Or maybe they're just really, really bad at explaining themselves. Who knows. We will have to wait and see what sort of contracts they actually strike in the manufacturing sector.

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