Monday, May 18, 2015


21 has announced their strategy: they've built an embeddable mining ASIC  that can fit inside of any power envelope, such as a mobile phone or home router. Or even a toaster, I guess. Their revenue model is to sell the chips to manufacturers and to also collect a portion of the mining revenue the chips generate. Although 21's announcement doesn't name the revenue share number, previous rumors pegged it at 75% for 21 and 25% for the user. So in essence, you get a small discount up front in exchange for a higher electric bill, forever. This is worse than a high-APR loan from Sears for furniture. That at least ends at some point.

Of course, the announcement from 21 says that the manufacturer can also keep a share of that revenue for itself, so the true end-user could get much less than 25%. Maybe even 0%. But they will still have to pay that electric bill.

How does this pass the "good business" sniff test? Does anyone at 21 actually care about delivering value to the end users?

Essentially what users are paying for is the chip and their electric bill, and what they get is a very small stream of Satoshis (or possibly zero Satoshis). Presumably 21 is running some kind of virtual mining pool that will smooth out the mining rewards, so that everyone (or at least the manufacturer) get some small level of income. But this mining pool also presents a risk for Bitcoin. If 21 succeeds in getting its chips embedded all over the place, and they mine Bitcoins using "free" electricity from their users, then they can out-compete all other miners and possibly put them out of business. And if they approach or exceed 51% of the hashrate with this pool, Bitcoin is no longer decentralized. It would be controlled by a single US firm that could be targeted (overtly or covertly) by the US Government.

I can't say I'm excited about the ethics of the business model either. To the end user who's spending the Satoshis, they're paying a huge mark-up for the Bitcoins compared to buying their own mining rig in exchange for the convenience of having a few Satoshis on hand at all times. Between losing 75% or more of the bitcoins they mine to 21 and the company they bought the hardware from, and the fact that most end-users have more expensive electricity than the industrial miners located in Oregon or Iceland, they're essentially paying a 400% tax on the mining work they do. Is that worth it? Is that a good deal for end users? I guess it depends on how much they value convenience, and how their mining costs relate to the open market cost of BTC. But it's not obviously a deal to me.

I can see this being a good business for 21 though, at least in the short term. They sell the chips and also get the recurring revenue from the mining work for as long as the device is plugged in somewhere. But is it good for users? It feels predatory to me.

Let's look at the use-cases proposed by 21 in their blog post. Several of them are exactly the same thing, phrased different ways. I have thus grouped them categorically:

Category 1: Overpaying for Bitcoins:

  • Micropayments. You can conveniently spend Satoshis on stuff that you overpaid for in the first place. Convenience is nice, but isn't there a way to solve convenience without overcharging people for the medium of exchange? Also, the amount of money you spend is inherently constrained by the revenue generated by the 21 chip. How many articles per month or downloaded songs is that? Can't be many.
  • Devices pay for services. Same as above, convenience for being badly over-charged, but instead of content your buying some service. A mesh network perhaps. Mesh networks are great. Isn't there a way to pay for them without paying the 21 tax?
Category 2: Actually not even a working feature
  • Machine Twitter. Only works if they ever get Sidechains to work. I'm ignoring this for now.
Category 3: Extracting revenue from users
  • Devices can pay channel partners. This is a way for manufacturers, retailers, and mobile carriers to continue to extract mining revenue from users long after the device has been sold, or is even under warranty. Yay! I'm excited about this possibility, aren't you?
  • Silicon-as-a-service. This seems ridiculous. There's no way home router's single-core miner produces enough BTC revenue to pay for the miner. Maybe it's a little cheaper, like Amazon's Kindles with Ads, but not free. And the user pays for the additional electricity used, so it's more like a high-APR "payment plan" that never has they hope of getting paid off. 21 just keeps taking your bitcoins, forever.
  • Bitcoin subsidized devices. This is the exact same point as previous. Why is it even a separate item on their list?
Category 4: Possibly Useful
  • Decentralized Device Authentication. This is possibly useful. In fact, it's the only part of the business model that seems useful to the end user. Unfortunately it's also the least fleshed out, and depends on developers of future services using the feature.
Category 4 is the only category of "features" which I consider to really be a good deal for the user. It's only useful though with widespread adoption. And widespread adoption only happens if manufacturers build the chip in. And their incentive for including the chip is only as strong as the revenue they can extract from the Category 3 features, which steals electricity from end-users. And if the channel participants keep too much of the Satoshi stream, the end user has nothing to spend, making the whole point of 21's existence worthless. I hope 21 has the sense to cap how much revenue the channels can take, otherwise the end-user ends up with nothing except a couple bucks knocked off the sticker price and a higher electric bill.

Also, let's think about the long term implications. If 21 succeeds, they will attract competitors. Mining ASICs are dirt simple to engineer. There will be a Chinese competitor to 21 within a year or two at most, and they'll compete for manufacturer share by offering a larger revenue share from the mining work. Eventually the manufacturers will have most of the bargaining power here, as they control the relationship with the end-users buying the devices. Meanwhile end users will get the mining chip that's best for the manufacturing company, not the end-user, since it's a an add-on feature most people won't care about. I don't see the situation improving for end-users over time, but it may get worse for 21.

If there's a best possible future though, it's this: 21 succeeds, Category 2 gets people using Bitcoin, and thus Category 4 gets a lot of support, and the convenience of adding Bitcoins to your wallet purchased off the open market improves, which means a real micro-payments market appears, and informed users start demanding "fair" division of bitcoins from their mining work - and some manufacturers actually deliver on that. In that future, we pay up front a fair price for our ASIC, and in return get lots of cool services and also get to keep and spend most of the Satoshis our mining work actually generates (minus only the pool operator's fee, which would be subject to market competition).

A lot of things have to go right for that to happen though, and I can just as easily see a situation where the channels take 100% of the profit from these chips and users get nothing but electric bills.

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