What’s the story?

Nebulous, the team building Sia, a blockchain driven cloud data storage platform, and Bitmain, the world’s leading producer of cryptocurrency mining hardware, are facing off over the use of Bitmain’s equipment to mine Siacoin. The battle highlights the power struggles between different participants in the crypto ecosystem.

Background

Boston-based Nebulous are building a decentralized data storage platform called Sia. Instead of users storing their files with centralized firms such as Amazon or Dropbox, on Sia files are distributed over a blockchain-based network of hosts, utilizing their spare disk space.

Like Bitcoin, the network is secured by miners, who receive the Siacoin cryptocurrency for their efforts. Originally, cryptocurrencies were mined using standard graphics cards (GPUs), but increasingly specialized chips designed and optimized for a specific task, known as ASICs, are being used.

Bitmain Technologies, headquartered in Beijing, is the leading manufacturer of ASIC mining equipment. Its sales of hardware, as well as running of the world’s largest cryptocurrency mining pools, resulted in estimated operating profits of $3-4 billion in 2017. Bitmain’s equipment is primarily used to mine major cryptocurrencies, such as Bitcoin, Ethereum and Litecoin, but this summer it also released hardware to mine Siacoin, the cryptocurrency used in the Sia platform. In doing so, it got to the market before a start-up competitor hardware manufacturer, Obelisk, managed to finalize the release of its Siacoin mining equipment.

So far nothing too controversial… Except that the people behind Obelisk are the same people behind Nebulous/Sia… And the latter are considering a change in the platform’s code, also known as a fork, which would prevent all non-Obelisk equipment from being able to mine Siacoin, thereby rendering Bitmain’s equipment useless.

On the delicate nature of crypto ecosystems

The situation highlights one of the key areas of importance facing the nascent world of crypto, namely that of the delicate power relationships between different participants in the crypto ecosystem. Cryptocurrency platforms typically aspire to be decentralized networks, run by and benefiting the participants in the network, rather than a single, central entity. In reality, there is the potential for certain participants to acquire outsized control over a network.

A viable crypto platform requires three primary parties: miners, developers and users, as explained by Akbar Thobhani:

“Miners keep the blockchain secure and growing so that developers have something to improve and so that users have something to use.

Developers improve the efficiency and user experience of the protocol so that it’s something users actually want to use.

Users spend and hold bitcoin as a means of value transfer and storage, making bitcoin sufficiently valuable that miners want to commit resources to mine it.”

For a crypto platform to be successful all three parties are required to be active and incentivized. A network without users is, quite literally, useless. Without users creating transactions on a network there is nothing for the miners to mine. It is up to the developers to make the network useful for users. A utilized network, with adequate transaction volumes, would result in a profitable proposition for miners.

The incentive for miners is to mine profitable cryptocurrencies. The incentive for developers is to increase the value of the network, reflected in the price of the cryptocurrency, as they typically hold a self-allocated, or pre-mined, amount of the currency. The incentive for users is to have a platform that they can use for its purpose (e.g. making transactions or, in the case of Sia, storing data), as well as potentially benefiting from an increase in the currency value, as holders of the currency.

Conflict potential

The potential for conflict stems primarily from concerns about too much centralization. If a single mining entity controls an outsized position of the mining capabilities, e.g. as a result of being the primary hardware provider or mining pool, then the fate of the platform can become dependent on that entity. A decision by the miner to shift mining efforts to another network could have severe, detrimental consequences for a network, leaving it exposed to security vulnerabilities, or attacks on the network. With the mining industry being primarily run out of China, there are also inevitable concerns about the potential for state-orchestrated interventions in networks.

If an entity obtains a significant amount of control, it could start to influence decisions related to the network. As open-source projects, changes to crypto networks typically result from developer community driven adjustments to the network’s code, known as forks.

An in-depth discussion of forks is beyond the scope of this post, but whether a fork is successful ultimately depends on its adoption by miners. If miners continue focusing their efforts on transactions based on the older code and don’t adopt the forked network with the new code, then the fork could be doomed from the outset.

Network forks are dangerous as they can divide a previously unified community into multiple, smaller and more vulnerable fractions. As a result, the decision to propose and initiate a fork is not taken lightly. If a mining entity obtains too much control, it could start to exert influence on the development community, imposing its will on the direction of future development.

Ultimately, the delicate checks and balances of the crypto ecosystem means too much power in the hands of any of the participants is a threat to the decentralized nature of a network.

Sia vs Bitmain

So where does the conflict between Sia and Bitmain sit in all this?

Until the release of ASICs hardware, Siacoin could only be mined with GPUs, such as those in regular computers. The release of the faster, specialized ASICs mining hardware forces those looking to mine Siacoin to purchase the new equipment. The team behind Sia are concerned that this would put too much power in the hands of Bitmain, the current sole producer of the ASICs hardware, threatening the decentralized nature of the network.

The direct relationship with Obelisk however severely clouds the issue. By supporting a fork that would invalidate all non-Obelisk mining hardware, Sia would in effect be granting itself a mining monopoly. It would be striving to restrict the control of a single entity, by shifting it to another one; one that it personally benefits from and that directly links the development and mining participants of the network.

Sia isn’t the first network to have taken on the battle with Bitmain. Earlier in 2018, Monero, a leading privacy-focused cryptocurrency found itself in a similar situation, with Bitmain releasing ASICs hardware to mine Monero. In a move similar to that proposed for Sia, it responded by implementing an emergency change to its code, rendering the Bitmain hardware useless.

The difference is that the team behind Monero doesn’t have a side business building competing mining hardware. The response was in order to preserve independence and to keep the mining capabilities in the hands of the community. Monero is in fact one of the cryptocurrencies that can still be mined with home computers.

In the case of Sia and Obelisk, having such a strong conflict of interest means that even noble intentions will be met with a suspicious eye.

Where to from here?

The potential implications of it all on of the two parties involved, Bitmain and Sia/Nebulous/Obelisk, are rather different.

Bitmain is planning a multi-billion dollar IPO. Even with the significant crypto asset price declines in 2018, its position as a leading player in the crypto mining space puts it in a strong position for the future. Bitcoin and other major coins will remain its main source of revenue. The tussle with Sia, albeit a nuisance, would most likely ultimately end up being little more than a minor bump in the road, regardless of the outcome.

For the team behind Sia and Obelisk the situation looks somewhat more precarious. As all crypto networks, its viability relies on having a strong, and ideally uniformly aligned, ecosystem of participants. The situation is already dividing opinions in the community and undoubtedly causing a huge amount of distraction.

Potentially more crucially, the situation has already resulted in several law suits against Obelisk resulting from the delays in shipment, as well as from a disgruntled developer. To add insult to injury, comments on a public forum by the CEO of Nebulous and Obelisk, David Vorick, have suggested that the relationship between Obelisk and Nebulous isn’t properly arms-length and that any successful legal action against Obelisk could therefore also have an impact on Nebulous.

At the start of January, Siacoin had a market cap of $3bn. Since then it has seen a precipitous decline, alongside all other cryptocurrencies. Nevertheless, as of September 21 it still has a market cap of over $200m. Its purpose as a decentralized file storage platform is a perfect use case example for a blockchain, and one of the elements of the Web3 stack. Being one of the earlier blockchain communities and not a product of the often greed-fueled and self-enriching ICO hype of the last 18 months also means it would be a great shame to see it implode on itself. Unfortunately that however does not seem out of the realm of possibilities.

 

For a more in-depth exploration of the situation and ongoing coverage as the story unfolds check out the reporting by Rachel Rose O’Leary @ Coindesk.

 

Disclaimer: All views expressed are mine alone. The above references an opinion and is for information purposes only. It is not intended to be investment or legal advice. Seek a duly licensed professional for investment advice. One bit of general advice though if you’re looking to invest: crypto assets are very volatile so don’t put in any more money than you’re willing and able to lose. I do hold some crypto assets myself, including a negligible amount of Siacoin.