In Roman Britain circa 100 CE, miners take a final look at a damn holding back the water that had been laboriously collected for months via aqueduct. In a few minutes, that damn will be opened and the ensuing onrush of water will clear away the dirt and surface rock, exposing the bedrock beneath. If the miners are lucky, they will find veins of gold or silver. If they do, they’ll set fires to heat and water to suddenly cool the rock, allowing the miners to gather the ore with picks and shovels.

Historically, mining is not for the faint of hard. It is grueling, dirty, and dangerous. The rewards are that you might find a deposit of valuable minerals and become fabulously wealthy. But there are no guarantees.

Bitcoin mining bears some resemblance to the history of mining for minerals, but not as many as you might think. Bitcoin is designed to be difficult to extract – a target goal is that a ‘deposit’ (block) of bitcoins will be discovered every 10 minutes. Since mining for bitcoins is done by computer algorithm, the rate of discovery can be controlled by adjusting how hard it is to find a block. This is an automatic process built into the core design of Bitcoin: after a preset number of blocks, the difficulty resets.

It’s also true for Bitcoin miners that there is an initial investment for mining equipment (initially, just a regular computer, but more recently specialized rigs costing thousands of dollars) and that there is no guarantee of finding any blocks. Contrary to a lot of reports that bitcoins are mined by solving ‘difficult math equations,’ miners are actually just looking for a number that will ‘fit’ a value computed from the header of the last block found. Doing this is less solving an equation and more guessing a number and seeing if it works. It’s kind of like picking a combination lock by guessing all the possible combinations.

Because the combination that opens the next block is based on the header of the previous block, every block discovered is linked to the block before it. All the blocks in existence, thus, are part of a single chain, each block verifying the validity of the block before and after it. Because all the blocks link up like this, no one can create false transactions (once they are accepted into the blockchain) since transactions can always be verified with the blockchain.

The world of Bitcoin mining now is all about getting machines that will guess as many of these combinations as fast as possible to beat out everyone else who is trying to do the same thing. Originally Bitcoin was mined using regular computers, but when the race for the next block got too hard, people started using the more specialized graphics cards intended for gaming. Enter the ASIC (Application-Specific Integrated Circuit), computers designed only to do this one thing, very well. The difficulty has been going up ever since as more and better ASICs are introduced.

KnCMiner made its appearance on April 8, 2013 by posting on the Bitcointalk Forum. It was kind of an inauspicious entrance to the field, with many of the commenters expressing mistrust of the startup. They had their reasons – lots of other startups had been announced in those pages only to disappear quickly.

The company was started by Sam Cole and Andreas Kennemar and registered in Sweden. The challenges for KnCMiner then, as now, are ones of development and scale; Development, because this is a new technology which by its very nature becomes obsolete very quickly. Scale, because KnCMiner, along with all the other companies in the field, needed to go from essentially nothing to massive production in a very short amount of time.

There were problems along the way. Most ASIC companies publicized products then in development and allowed for preorders. If problems arose in the design, materials, or manufacturing process of those units, the orders were delayed, usually to large cries of ‘fraud’ or ‘scam’ from the mining community. Several companies, including Butterfly, Hashfast, CoinTerra, and AMT are facing legal challenges due to their inability to fulfill orders on time or to adequately handle customer service or refunds. This is all exacerbated by the fact that in the Bitcoin mining rig world, a rig not delivered on time means that the miner isn’t recouping costs and is losing ground since the rig he hasn’t received is already losing value due to the rapid advances in ASIC technology.

Although KnCMiner has not had these troubles to the same degree as some others, they are currently weathering a storm caused by a two-for-one offer they made. Miners who had ordered rigs from the first and second batches of the Neptune rig were offered a third rig for free. While they wait for the rig, they were offered free cloudhashing (remote computing for the purpose of mining bitcoins) until the rigs arrived, but also changed their terms so that miners who accepted the cloudhashing gave up the right to the free rig. Cries of foul have caused the company to backtrack a bit, with Sam Cole saying “Really, it’s a lose-lose for us and either a little win or a big win for the customers.”

It should be stressed, though, that KnCmining has been meeting its production deadlines, which is actually kind of impressive given the environment. As we saw with the disastrous handling of Mt. Gox, an inability to plan and follow through in the Bitcoin space will most likely leave a company in a smoking pile off ruin, KnCMiner is still plugging. The upshot is, mining is still touch work, even for the guys making the rigs.

I, like a lot of people, still have a lot of questions about mining, and I was lucky enough to get Nanok Bie, CMO of KnCMiner, to answer some of my questions. This interview was conducted before the news of the 2-for-1 offer was announced, so that is not addressed in the interview.

Miners are extremely important to the security of Bitcoin, but also of late have become something of a threat to it. Do you see the problem of centralized mining pools being resolved?

Yes, as I think we’re just in the very early stage of Bitcoin’s history. Many compare to the Internet in 1995. I worked with very early web development in 1994-95, when Netscape came out, and I agree the excitement is about the same. In the longer run, we’ll — just as with the web — have many more big powerful players, and many more small players, also in the pool business, and natural decentralization will occur. It has increased just lately after the Ghash hubbub.

Bitcoin transactions are very quick and safe thanks to this growing network of miners. Pools and farms are inevitable. In many ways, the hash rate race benefits Bitcoins’ users. Mining is done by people interested, and invested, in Bitcoin. They are in the same boat and will help protect the network’s integrity. It’s just too late for a malignant actor, let’s say a nation-state, to start producing the immense processing power needed to destroy Bitcoin. That would mean “Manhattan Project”-like proportions, as the tech underlying the current and next generation of SHA-256 crunchers have a very healthy head start, and the IP is protected. However, I for one won’t point my miners towards Ghash.io in the near-term future, even though I think many of the alarmists going on about the 51%-attack scenario do so because they are promoting their own protocol at the same time.

Meanwhile, the financial industry is just dipping its toes in this arena and they are far from thinking about attacking Bitcoin. They are making the majority of their profits elsewhere and they are naturally focused on those businesses. Nation-states have a multitude of other problems to attend to. When they eventually tag on, it’ll be way too late to attack the network, and I personally don’t believe nation-states will divert resources from anti-terrorism, etc. to try to destroy Bitcoin. Also, I don’t believe any of the current major players would like to risk Bitcoin’s future on executing double-spends, as they’re already involved in a profitable business with a great outlook. If they did, miners would abandon that pool very quickly. But Bitcoin’s roller coaster is going to continue and other worries will crop up, like what happens when we approach equilibrium between the cost of electricity and the amount of rewards being generated. If a large portion of miners decided they’d rather turn off their miners than continue burning electricity, it would wreak havoc with the difficulty when trying to find the next block, and transactions could slow to a trickle. If the exchange rate increases, that problem goes away.

Producing mining rigs has been a tricky business. What have been your biggest challenges and what do you think the future of mining rigs is?

I’m new at the position, so I don’t want to elaborate on past challenges, more than to say that the staff has worked very hard. Concerning the future of rigs, I believe there’s room for lots of different solutions, but most of it hangs on the exchange rate. The exchange rate changes everything in mining. If Bitcoin succeeds, it might be economical to embed processing chips in almost anything electrical. You might even see companies offering heating as a by-product. Why not use Bitcoin processors to heat seasteadings, for instance? And if they were to get too hot, you use the ocean for cooling. Or use processors to heat regular houses in zones where temperatures are below 15 degrees Celsius. Then the cost for the electricity is offset by the fact that you’re generating heat for your home, while mining. In big farms, you might be able to provide distance-heating for the community, thus making farm mining more “green” and profitable (we’re looking into that). Also, as Bitcoin embraces other business areas (like asset-tracking) there will hardware and software opportunities there too.

So for us as a company there are a lot of opportunities, but limited resources, and we need to make the right choices going forward on what products to bet on, but of course we are going to continue pushing and competing on performance. You’ll also see other types of products from us in the future, but I can’t go into that for obvious reasons.

Your new rigs are nanoscale and you say that you have beaten some of the largest, most established companies in the world to market with this tech. How do you keep ahead of the curve?

It’s a mix of intellectual property, good business practice and great partnerships. But it’s really our sizable engineering staff that puts us ahead; we simply employ a bunch of really talented IC engineers, mathematicians and code wizards.

If you were put in charge of Bitcoin for a day, what would you change about it?

Nothing. I talked about that with Gavin Andresen just a few weeks ago, and the concern I vented was around funding for continued development, and I suggested the crazy idea of changing things a bit so that a little piece of the block confirmation reward goes into a fund for development. Then you could have decentralized voting on which parts to focus efforts on and release funds to the selected project through multi-sig, etc., but he mostly laughed and said it would never fly with the miners (they would never accept a change to the software that diminishes their return, even ever so slightly, he said). Anyway, he assured me there is no shortage of funding, and he thinks (I agree) that it’s better to move slowly and securely forward than to rush on with development. KnC also contributes to that funding and I think it’s more important to employ the absolute best, and senior, programmers/developers to be effective than to rush on and implement every idea out there. The Bitcoin Network works remarkably well already today, and I’m pretty confident on its strengths going forward.

You can visit KnCMiner here.

The author has no affiliation with KnCMiner and is not a miner himself.

By Mark Norton

[email protected]

6/27/2014