Mining is Negative Sum

The Bitcoin mines.
The dark underworld;
The chaotic fringe;
Behold, the wasteland of rekt dreams and abandoned code.
Fighting, hashing, surviving.
The blood of martyrs cries out.
Those who overcame death stand triumphant, for it cannot be otherwise.

The game theory of Bitcoin is well regarded as positive sum and incentivizing cooperative behavior. It is a marvel of technology and economics, resulting in the most sound money the world has ever known. Yet this entire system sits atop an adversarial and zero sum competition known as mining.

While mining can be better understood as decentralized payment processing, the market dynamics and incentives are a cutthroat zero sum game. Worse still, an iterative version of this game is negative sum.

The bigger they are ...

Roughly every ten minutes a new block is found (mined) which increases the total supply. Every 2016 blocks the network difficulty adjusts to ensure that the issuance is on schedule (one new block every ten minutes). And every four years the issuance is halved (the famed "halvings"). This may seem simple in theory, but in practice the difficulty adjustment means that miners are in direct competition with each other, and worse, the halvings make this a negative sum game.

For example, imagine a big mining farm which mines ~10 blocks per day (out of 144 daily average). They are profitable so they invest in their business, adding new fleets of machines in order to double their hashrate. Once the new machines are online, this big mining farm doubles their hashrate and mines ~20 blocks per day -- however, that means that the daily average went from 144 to 154. This results in a difficulty adjustment that brings the daily average back to 144. Despite doubling their hashrate, the higher difficulty means they're only mining ~18 blocks per day, and critically, all other miners suffered equally.

After the halving this miner finds themselves losing money, ~18 blocks per day is not enough to stay in business. They shut the machines off. The daily average drops from 144 blocks to 126. The next difficulty adjustment will bring the average back to 144 (lowering the network difficulty). Immediately, other miners see an increase (as it's now less difficult to mine blocks). A miner that was receiving ~20 blocks per day would now be mining ~23 blocks.

This change might cause the out-of-business mining farm to get back into the game. They turn all their machines back on, and sure enough, ~23 blocks per day -- until the next difficulty adjustment -- and then their daily average drops back to ~18, hurting everyone else in the process.

The only chance for this beleaguered mining farm to have any hope of survival is if other miners drop out first. They take out loans, and relocate to find cheaper energy. And in all their desperate moves, are they prepared for the next halving? What about the next generation of mining machines? Will they take out even more loans?

The easier they fall

Unlike gold mining, Bitcoin miners are in constant and direct competition with each other, such that the fortune of one will come at the expense of all others. And hurting one miner will directly benefit all other miners. Miners that succeed will find their profits dwindle over time even as overall mining revenue grows. Reserves will be tested and depleted as more and more competition enters the space. And there will always be more. Such is the nature of any zero sum adversarial game.

On one hand, this benefits decentralization, as any attempt to monopolize mining will result in inevitable attack and disintegration, and the cost of bureaucratic overhead will make the larger miners suffer most. Mining, even if the value of Bitcoin was stable, is like a continuous arbitrage opportunity (finding cheap enough electricity to power advanced enough machines), with profits that inevitably diminish through competition. This forces miners into survival mode, and as the weak miners fail this will tip the surviving miners into a moment of increased profitability, which will attract more entrepreneurs and the cycle repeats, forever. Unlike saving in Bitcoin, which encourages low time preference long-term thinking, mining is a high time-preference, high risk game.

Is such a cutthroat adversarial zero sum game sustainable? For an individual miner, the answer is no. However, as long as people are able and willing to try their hand at this competitive game, then it will continue. Ugly and embattled, will it be sufficient? Time will tell.

The tower of good intentions

Most worrisome of all, is not the bad actors, but the good-intentioned and honest miners. Honest and good-intentioned miners would not break consensus rules but for their own survival might ally into a monopoly and comply with regulatory agencies, ignoring blocks from other miners (the "bad" miners), controlling the mempool and transaction fees. With this level of control, a good intentioned monopoly would be the downfall of Bitcoin's decentralization.

To not get your transaction processed by the monopoly mining pool is to risk it being ignored and overwritten in a chain reorg. Despite their good-intentions, the monopoly miner would lead to the same regulatory capture as we see with fiat. Better if they had evil intent and broke consensus by changing the supply, for then it would result in a hard fork, and users could choose which chain to store their wealth.

For Bitcoin to be true, any attempt at monopolizing mining must fail. The adversarial zero sum game must be sustainable and also sufficient to prevent the centralization of mining, even amongst those foolish enough to bring their good intentions into the adversarial world of mining. Ultimately, mining must remain a cutthroat zero sum game.

Therefore is the name of it called Babel;

because the Lord did there confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the earth.

• Genesis 11:9