“Unheard of” Development Path to Custom Hardware
Data center development is an expensive business, which historically has created a high barrier to entry. It would seem unlikely that bitcoin entrepreneurs could create their own custom facilities.
But there’s an interesting precedent in the bitcoin hardware industry, according to professor Michael Bedford Taylor, who heads the Center for Dark Silicon at the University of California at San Diego (UCSD). Taylor notes that the evolution of bitcoin ASIC hardware followed an unusual template.
The pursuit of more powerful mining machines “led to the development of customized silicon ASICs without the support of any major company,” Taylor writes in a paper profiling these grass-roots efforts. “The users self-organized and self-financed the hardware and software development, bore the risks and fiduciary issues, evaluated business plans, and braved the task of developing expensive chips on extremely low budgets.”
Bedford, who was among the developers of the TILERA many-core computing architecture, says this path was “unheard of in modern times, where last-generation chip efforts are said to cost $100 million or more and the number of ASIC starts drop yearly.”
A number of these hardware startups have funded operations through pre-orders for hardware, which has led to customer complaints when development is delayed, as has happened with several providers.
Bankruptcy Illustrate Risks of Fast-Moving Business
There are risks in the bitcoin infrastructure business, as seen in the case of Alydian, a company formed by VC-backed Bitcoin incubator CoinLab to provide “enterprise-scale mining.” Alydian filed for bankruptcy in November, just three months after coming out of stealth mode, saying rapid advances in hardware had undermined its business plan. CoinLab told the Wall Street Journal that the dramatic increase in mining speed in the Bitcoin network has lowered returns for all Bitcoin miners, leaving Alydian unable to deliver on contracts to mine bitcoins for its investors and customers.
It’s a fast-moving and sometimes tricky landscape, and it’s hard to say how regulations might affect the future adoption of bitcoin. But data center operators are beginning to pay attention.
“It’s too early to tell, but the bitcoin industry does require a lot of power and cooling to support mining,” said Lisa Rhodes, VP of Sales and Marketing at Verne Global, which hosts CloudHashing. “We view the bitcoin industry’s potential as a new customer segment no differently than any other industry that has the same type of high computing and power requirements.”
One challenge is that many bitcoin businesses currently have difficulty finding banks to work with them. About 60 hosting providers allow customers to use Bitcoin to pay for hosting services, including NameCheap, UK Host, WordPress.com, SugarHosts, InterNOC 24 and Woo Servers, among others.
Accepting Bitcoins: Early Movers Emerge, But Risks Remain
“Not a lot of hosts use it so you’re opening yourself into a new market,” CubicWebs CEO Michael Dance recently told The WHIR. “I liked the idea of it and anyone can use it just by using the Internet.”
One advantage of bitcoin is that it eliminates chargeback risk, as payment takes place directly and immediately. The downside is the fluctuation in the value of Bitcoins, which have bounced between $500 and $1,100 in value over the past three months.
Obiodun says Bitcoin’s rise in value is attracting larger investors to the space, which translates into more substantial backing for bitcoin enterprises, including mining operations. That could include some of the world’s leading technology investors. An example: a secretive company named 21e6 has raised $5 million. Business Week reports that 21e6 includes wealthy members of the Silicon Valley elite who are developing specialized hardware to “build the world’s largest Bitcoin mine – a virtual money printing machine.”
For his part, Obiodun expects that the success of CloudHashing will allow him to examine more efficient data center designs, including immersion systems similar to the one created by ASIC Miner in Hong Kong.
“We’re making substantial investments in hardware,” he said. “We’ve had a remarkable amount of growth. We firmly believe we’re at the early stages of the expansion of the bitcoin network.”
In part two, we look at the future path of bitcoin’s infrastructure, including the opportunities and challenges in centralization, and the potential role of fees in the bitcoin network.