Hashrate vs Oil: A Commodity Comparison
Let’s compare this new 21rst century commodity with the most-traded commodity of the previous century, Oil —
Producing hashes for Proof of Work algorithms, or “mining”, is the industrial production of a virtual commodity within the mining ecosystem.
Hashrate is the virtual commodity produced by miners and sold to the network as a consensus & security mechanism for the native token of that network. It’s just one of several new commodities within the mining sector and has some unique properties never seen in history.
First, hashrate is an ephemeral asset. It cannot be stored but can be delivered anywhere in the world instantly. It’s comparable to electricity except with no transfer cost nor infrastructure required. It must constantly be consumed in order to have market value, and hashrate has no value if it was not produced within the past blocktime period (~10 minutes for Bitcoin). This is the inverse of crude, which can be stored indefinitely and which delivery of is a logistical feat.
The entire world economy pauses as tugboats attempt to unplug the global hashrate delivery infrastructure.
Second, it almost always trades in backwardation. The future expected value of a unit of hashrate is lower than spot because the difficulty is always increasing as miners are added to the network. This has some interesting implications for financial instruments built on Proof of Work. Oil, on the other hand, is comparatively cyclical (and might be looking up the next few years)
Third, the global state of hashrate production can always be known. Because of the public nature of block production, we can know global hashrate in real time. While we can reasonably intuit current oil production, we rely on market analysts and statements from OPEC+. Hashrate production can be watched in real time and is statistically derived from cryptographically proven rules. However, both industries are similar in that the opaque nature of ASIC manufacturing/mining infrastructure mirrors that of planned drilling & production — we can only peer through a glass darkly to estimate the future and is often at the whims of nation state geopolitics.
We can consider hashrate to be a raw, unrefined commodity until it is submitted & accepted by the network. Mining pools are the primary buyers of “raw” hashrate, and do the job of collating + “delivering” it to the network. Here the analogy breaks down. In mining, there isn’t really an equivalent to midstream crude transportation because there is no transportation. However, the future of “refining” hashrate could be very interesting, especially with the advent of “Miner Extractable Value”.
Later this summer we’ll take a look at Compute infrastructure as it compares to O&G.
-Charlie Spears, Strategy @ Nakamotor
Week in review —
Compass inks deal to mine off nuclear.
Cambridge data & timeline on China’s Bitcoin mining exodus.
Texas celebrates Bitcoin miners setting up shop.
Relavent thoughtpieces —
Ethereum miners grapple with MEV. Good time to review this piece.
Schumpeterian destruction in Bitcoin.