Hashrate Token — A New Creature Combining DeFi and Hashrate Market

In January 2021, Standard Hashrate Group and Poolin launched the hashrate token projects, BTCST and pBTC35A respectively. As of January 25, 2021, the total computing power of the BTCST reached 150,000 T [1], and the total computing power of the pBTC35A reached 100,000 T [2]. Hashrate token has not only gained users’ support in the market, but also sparked attention in the whole industry. As an early product of the cryptocurrency, hashrate market was created long ago since the birth of Bitcoin. For such a long time, besides Cloud hashrate, which was not quite a successful attempt, there few noticeable innovation in the hashrate market. And now, the emergence of hashrate tokens may open up this relatively sizeable yet dull market to new opportunities.

But how should we understand a hashrate token now? How exactly will it change the hashrate market? Will the hashrate token have a long-lasting presence or become a flash in the pan? These are important questions for us to ponder. In this article, we will take BTCST and pBTC35A as examples to fully analyze the hashrate token from DeFi play, product design, architecture, token distribution, token value capture, revenue leverage, underlying mining machines, mining costs, tokenization steps, role management, premiums and arbitrage, etc. At last, this report will deliver its own conclusions on these important aspects.

Background

There have been several attempts to tokenize computing power in the market, but none of which has been considered successful. This time, the new mechanism of hashrate token is a DeFi gameplay. Since the first half of 2020, DeFi has emerged and continuously evolved innovatively in various modes.In the DeFi world, a variety of unique gameplays such as Yield Farming, Fair Launch, Rebase, Protocol Integration, and Liquidity Lock have attracted much attention. These plays have brought an unprecedented two-tier game model to the cryptocurrency world, attracting millions of players to participate in it.

At the same time, DeFi is constantly combining with other tracks in the crypto world. For example, DeFi play combined with stablecoin gave birth to the algorithmic stablecoins, a big hit these days. Currently, the essence of the hashrate token is the DeFi play of the tokenization of Bitcoin mining machine hashrate. Yield Farming, Fair Launch, Protocol Integration, and Liquidity Lock are all available in BTCST and pBTC35A. But, BTCST is tokenized, while pBTC35A is dual tokenized. In the pBTC35A project, except for the hashrate token pBTC35A, there is also the governance token Mars.

Basic Product Display

Image 1. BTCST Dapp

This image above is the Dapp page of BTCST. Users need to buy BTCST on an exchange or Pancakeswap and then pledge BTCST in order to get the mining rewards from the mining machine.

Image 2. pBTC35A Dapp Display

The above is the Dapp page of pBTC35A, and the user process is roughly similar. Users need to buy pBTC35A and then stake it to get the mining revenue. However, in pBTC35A it is possible to select different staking pools to access WBTC and the governing token MARS under various risk exposures.

Architecture

Image 3. BTCST architecture, referenced from BTCST white paper

Overall, the architecture is analogous for both BTCST and pBTC35A. As for asset operations, they are all centralized. The mining machine mines in the pool and then offers users a revenue settlement after deducting mining expenses and the operations costs. In terms of funding,, they all operated through a decentralized Dapp. Once the Dapp gets the rewards, they will be distributed to the users who have pledged tokens.

Token Distribution

BTCST is the platform’s native BEP-20 functional token. BTCST takes the usual fair distribution approach of the Defi world. BTCST has no team share, no advisor share, no private and public offering. Behind each BTCST is 0.1T of mining machine hashrate, and the total token amount is planned in stages but no upper limit. Currently 1.5 million BTCSTs have been issued. 40,000 BTCSTs are distributed through an exchange’s Launch Pool mining for one month.

Image 4. BTCST mining page in the launch pool of an exchange

And the pBTC35A project has two tokens, pBTC35A and Mars, where pBTC35A stands for Hashrate and mining revenue rights. pBTC35A has an initial run of 50,000, each representing 1TH/s of hashrate power at an energy consumption ratio of 35W/T. It has now been increased to 100,000 pBTC35A. Mars, the governance token with a total of 2.1 billion, will be distributed linearly over 4 years. Mars distribution starts on January 1, 2021 and ends on December 31, 2024.

It is important to note here that pBTC35A does not apply to fair distribution. 75% of Mars will be given to mining participants, 20% to the Mars team, and 5% to the foundation.

On January 13, BTCST went live on the innovation hub of an exchange. The price has basically stabilized at around $70. The overall price of BTCST is stable. And after pBTC35A went live, the price went up from $98 to $195, and then dropped back to $104.

The price of pBTC35A is volatile. After the launch of Mars, the price rised from $ 0.036 to $ 0.29, and then dropped to $ 0.086. Mars’ price is much more volatile.

Distribution of Incentives

Like many DeFi mining projects, BTCST’s mining rewards depend on the amount of tokens staked and the staking duration. If more than 60% of the BTCST is staked for mining in the Dapp, the Dapp will distribute all the BTC incentives to users. However, if less than 60% of BTCST, only 60% of the rewards will be distributed to users. The remaining 40% of the incentive will go into the savings pool and be used for security and market making of the token.

It is worth mentioning that according to the current token price, the payback cycle for buying the token and staking is about 562 days. This payback time is significantly longer than the 365-day payback baseline in the mining business. This is because BTCST token is more liquid than the mining machine and thus enjoys a liquidity premium. The liquidity premium makes the payback period longer for pledged tokens compared to a mining machine.

The pBTC35A adopts the classic distribution model of Pool1 and Pool2 like other DeFi projects. Pool1 is a single-token pool, where users stake pBTC35A to get wBTC and MARS earnings. It has a lossless staking mining mechanism. And in Pool2, users need to stake LP tokens to get revenue. Pool2 has three pools in total, which require pBTC35A-USDT LP token, Mars-USDT LP token and Mars-BAC LP token on Uniswap respectively. The BAC here is not the token within the pBTC35A system, but the token of the algorithmic stablecoin project Basis Cash. This kind of nested mining between tokens belongs to the DeFi Protocol Integration.

Pool2’s LP token mining, which brings impermanent loss, is not lossless mining. To compensate for losses, Pool2 yields typically reach an annualized rate of 1000% or more. It is worth mentioning that Pool1’s wbtc incentive is calculated on the actual staked pBTC35A ratio. And the proceeds without pledging pBTC35A are divided into Pool2 as excess rewards.

Token Supply Increase

The tokenization of BTCST needs to be incremented by adding hashrate. Miners can apply to the project team for hashrate tokenization. Once the team permits the miner’s request, the miner will receive the incremental BTCST token and the team will take ownership of the mining machine.

Be aware that the newly issued token needs to be locked for 25 weeks and then unlocked linearly every week. This liquidity lockup is also a typical DeFi play, which can reduce the supply of token for a period of time and help maintain the price in the secondary market.

Revenue Leverage

From the information disclosed by BTCST, on January 6, 2021, the revenue from BTCST staking mining is 0.000721 BTC per PH of computing power, which is approximately 14 times more than direct BTC mining. According to the statistics on the official website, staking mining revenue on January 26, 2021 is enhanced by 11.22 times to direct mining. Let’s discuss this amazing rate of return.

As we mentioned earlier, 60% of the incentives will be allocated when the staking ratio is below 60%. The current total issuance is 1.5 million, and the total number of staked tokens is 80,200.

If the staking ratio is less than 60%.

Enhancement factor = total token issuance * 60% / number of staked tokens

The 60% return of 1.5 million tokens is equivalent to 0.9 million tokens mined directly by mining machines. And now only 802,000 tokens are distributed to users, and the earnings multiple is 90/8.02 = 11.22x. The source of the yield leverage effect is the low staking ratio.

Now let’s see the staking ratio of pBTC35A. The ratio currently stands at 96.97%. As staking pools of Pool1 and Pool2 will all receive 100% of the mining rewards, currently the earning multiple for pBTC35A is = 100%/96.97% = 1.03x. As you can see, the staking ratio of pBTC35A is pretty high now, resulting in an insignificant multiple of its return.

Mining Assets

To tokenize the hashrate of the mining machine, the miner must first standardize the machine. An important requirement for standardizing mining machines is to achieve a consistent energy consumption ratio for packaged mining machines. A consistent energy consumption ratio of miner packages will enable miners to achieve consistency in their revenue structure and electricity cost structure.

BTCST’s mining machine package requires an energy consumption ratio of 60W/TH, which is close to the level of T15 mining machines. The pBTC35A mining machine package, on the other hand, has an energy consumption ratio requirement of 35W/T, which is close to the level of S19 mining machines. Of course, this is not suggesting that all machines in a mining machine package have the same energy consumption ratio. In practice, it is possible to combine and match so that the weighted average energy consumption ratio reaches the required value.

For example, a one-to-one configuration of the Ant S17 mining machine (75 W/TH) and the Ant S9 SE mining machine (45 W/TH) would allow for an average energy consumption of 60 W/TH.

From the public data, adaptable models of mining machines for the BTCST project are:

1. Bitmain: S9k, S9j, S9i, T17, S17, S17 Pro, T19, S19, and S19 Pro;

2. Innosilicon: T2T and T3+;

3. WhatsMiner: M10s, M21s, M20s, M31s, and M30s;

4. AvalonMiner: A1146, 1066, 1166, 1166 Pro, and A1246.

The above are the mainstream mining machine models from major mining machine manufacturers.

The pBTC35A project has not currently disclosed its mining machine models in detail.

Steps of Tokenization

After standardizing the mining machine, a series of steps need to be performed to tokenize the standardized miner’s hashrate. From BTCST’s public disclosures, the first step in hashrate tokenization requires miners to apply to the project team. They can choose to tokenize at the miner’s location or to deliver the machine to a nearby qualified operator. Requirements for the two are different, with the former requiring miners to meet the standards of compliant operators and the latter only requiring miners to meet certain criteria. If the criteria are met, the team and the miner will sign the transfer. Do note that this is not a pledge or lease, but a direct transfer of ownership of the mining machine to the project team. The final step is for the team to issue additional tokens and distribute them to the miner.

If a miner wants to become a qualified operator, the hashrate power at his disposal must first reach 100 PH/s. Secondly, the project team will conduct a site visit to the miner’s mining farm, including but not limited to the mining pool’s environment, infrastructure, power quality, operations and compliance capability. The review is somewhat subjective.

For access to mining machines, it is relatively objective. First of all, the total computing power of the miner needs to be at least 5PH/s. The model number must be one of those mentioned above. The mining machine needs to be sent to a designated qualified operator for an 8-hour test. The power consumption and hashrate error of the test results cannot exceed 5% of the model value.

And currently pBTC35A has not disclosed its tokenization process and related access criteria in detail.

Mining Costs

Those familiar with the mining industry know that mining not only yields Bitcoin mining revenue, but also bears operation costs. In the process of hashrate tokenization, it is not only necessary to solve the problem of mining revenue distribution as incentives, but also to deal with operational costs in standardized ways. The majority of these costs are for electricity. Please check the formula for calculating electricity costs.

Daily electricity cost = energy consumption ratio * hashrate per hour * 24 hours * electricity price per kWh

In the above formula, the energy consumption ratio * hashrate per hour * 24 hours equals to the daily electricity consumption, and finally it is multiplied by the electricity price to get daily electricity cost.

As mentioned before, the energy consumption ratio of mining machines in BTCST is 60W/TH, i.e. 0.06KW/TH, while the energy consumption ratio of mining machines in pBTC35A is 35W/TH, i.e. 0.035KW/TH. On the other hand, BTCST has a flat rate of $0.058/kWh, while pBTC35A has a flat rate of $0.0583/kWh. It can be seen that the energy consumption ratio of BTCST mining machines is significantly greater than that of pBTC35A, but the electricity cost of BTCST is slightly lower. Besides, BTCST is subject to a 3% electricity loss deduction, while pBTC35A is subject to a 2.5% pool fee deduction.

The daily operating costs of the mining machine are recovered through the sale of Bitcoins. Neither BTCST nor pBTC35A currently disclose their hedging solution against BTC price fluctuations.

Role Management

In the way of hashrate tokenization and operations, players need to cooperate with each other. First, audit roles are needed throughout the process. Run-offs in the expenses of mining operations has always been a management difficulty. Therefore, the tokenization process requires a solid auditing role to ensure the transparency of mining operations. From public disclosures, the audit of BTCST is the responsibility of the mining pool.

Secondly, after hashrate tokenization, the issued tokens are traded in the secondary market. Thus, there will be certain market making and market value management needs. This task is usually completed by the project team or by a professional third-party team hired by the project team.

The landing and operations of offline mining machine mining is also an important task, which may also encounter challenges. And the environment and geography of mining pools varies from one to another. Therefore, in addition to the mining farm operated directly by the project team, other farms can also be operated by affiliate partners. From published information, it appears that BTCST has adopted exactly this open franchise approach to operating mining farms.

As shown above, both BTCST and pBTC35A require the Dapps to direct users to buy tokens, stake tokens and receive their earnings. Therefore, the operations of the Dapp is essential and is usually the responsibility of the project team.

Last but not least, governance is necessary to make adjustments to the future direction of the project. Effective governance mechanisms are needed for token issuance, cost adjustment, and settlement of excess revenue. According to the information disclosed by BTCST, it does not choose Dao organization as major DeFi projects. BTCST has adopted a project governance committee system. The Committee is set up by the project team and partner pools, and is governed in the traditional way of an offline vote.

Premiums and Arbitrage

As mentioned above, there is a huge premium for buying a BCTST token versus buying the computing power behind it in the mining market. We will refer to the way of comparison in the article “Hashrate token, the game in the Grayscale of the mining world” article, comparing BTCST token with T15 mining machines and comparing pBTC35Atoken with S19 mining machines (with a close power consumption ratio). Let’s calculate the premium of these two tokens relative to the mining machine with the latest data as of January 28th.

Currently, a used T15 mining machine is about $509.26. And the T15 hashrate power is 22T, which is equivalent to 220 BTCSTs. The current price of BTCST is $62.53, which makes 220 BTCSTs totaling $13,756.6, which is 27x the price of T15. The premium of 27 times is very impressive.

There is no doubt that the premium for BTCST will give miners an incentive to exchange their own mining machines for hashrate tokens. This is much like Grayscale, creating an artificial arbitrage space in the US stock market and crypto market.

The pBTC35A, on the other hand, does not have such a premium. The current price of a used S19 mining machine is about $100, and its hashrate power is 1T, which is equivalent to the hashrate power behind 1 pBTC35A. And the current price of pBTC35A is $97.19. That said, the price of pBTC35A is about the same as buying the mining machine outright, with no premium and even a slight discount.

So why is there such a big difference between the premiums of BTCST and pBTC35A? Or shall we ask, why does BTCST have such an amazing premium? The main reason, we believe, is that the level of market cap management of BTCST and the brand support of an exchange makes retail investors buy tokens and thus push up the premium.

Staking Ratio Differences

As mentioned above, the total issue of BTCST was 1.5 million, while only 80,200 tokens were staked. The staking ratio of BTCST is only 5.35%, while that of pBTC35A is 96.97%. How can we explain such a low staking ratio for BTCST?

BTCST is a token that is already available on an exchange, and the majority of users on this exchange are traders in the crypto world, while the penetration rate of DeFi users is relatively low.. Many users of this exchange are not aware of DeFi mining, and the motivation for buying BTCST is mainly because of secondary market profits. And, there is no guide on the APP of this exchange to direct users to locking and mining. Of course, in the long run, the staking ratio of BTCST users will also increase over time.

The staking rate of pBTC35A is as high as 96.97%%, partly because pBTC35A is not available on any prestigious exchanges and there is no huge external liquidity. Another reason is that the governance tokens, Mars and Pool2 bring a more than 1000% APY, which attracts a large number of DeFi native users. These users are familiar with DeFi’s staking mining without obstacles.

Risks

Despite the unique features of hashrate tokens, we must point out that the development of the hashrate tokens is still immature and there are many risks. The operational management issues that have existed in mining farms still occur in hashrate tokens. Mining machines hashrate competition and price fluctuations, and other risks will also lead to long-term uncertainty of earnings. Of course, the fluctuation of the secondary market is also one of the risks that all investors need to take.

In the whole life cycle of mining machines, there may occasionally be equipment damages, power instability and policy changes, which will challenge the standardization of computing power and hinder its tokenization. At present, from the disclosure of the various projects, there is currently no pre-planning for the impact on tokenization of various scenarios that may arise throughout the life cycle of mining machines. For example, if a mining farm is closed due to a certain power policy, whether such loss should be borne by all token holders? And the relevant liability identification is not clear, either.

Like cloud hashrate, hashrate tokens are fairly centralized throughout the hashrate revenue calculation as well as mining machine access. This kind of centralized operation depends highly on the credit of the operator, and there are risks alongside.

Conclusion

At the beginning of this article, we mentioned that the essence of the hashrate token is the DeFi play combined with the tokenization of Bitcoin hashrate. Based on this analysis, we have seen several DeFi world classic gameplay options in BTCST and PBTC35A, such as Yield Farming, Fair Launch, Protocol Integration, and Liquidity Lock. These plays have brought new money games to the hashrate market and attracted many players here.

Most liquidity mining projects today in the DeFi market do not have lasting value creation capabilities. These projects often quickly fall into a cold silence after a short-term exaltation of capital gaming. Compared to ordinary liquidity mining DeFi projects, hashrate mining has more lasting and clear capital gains. Because of this, we predict that hashrate token projects, if done properly, will obtain a significantly longer life cycle than ordinary DeFi mining projects. However, on the contrary, the growth rate and wealth effect of these projects in the start-up period will not be as fast as that of the successful DeFi project, because the capital gains of hashrate mining are too clear and the ceiling is obvious.

Compared to direct mining, hashrate tokens have more flexible entry and exit. In addition, the calculated computing power of a hashrate token is at a significant premium, but the return will be increased due to the low staking rate. Unlike cloud hashrate, which was once a mess, the hashrate token is more standardized, and the rights and interests can be circulated in the secondary market. And, DeFi gameplay offers a second layer of capital gaming that cloud hashrate does not have. Rather than buying Bitcoin directly, BTCST is the equivalent of a leveraged token, with no liquidation risks and no frictional losses. Because of the above characteristics of hashrate tokens, they will bring a brand new incremental liquidity to the hashrate market.

As Grayscale, hashrate tokens have artificially created a severe arbitrage space in the primary and secondary markets. Grayscale is a free-flowing single-sided membrane. By depositing bitcoins, you get a Grayscale share of Bitcoin trust, but cannot redeem your own Bitcoin thereafter, similar to a one-way membrane. Hashrate token is also a one-way membrane, mining machines are unable to redeem after the transfer and exchange of tokens .

For retail investors, it is without a doubt a brand new market for hashrate. Hashrate tokens make the hashrate market much accessible and flexible, leaving more opportunities for small and medium-sized investors.

References:

[1] Standard Hashrate.Official Site.https://get.1-b.tc/#/history

[2] Poolin Mars.Official Site.https://mars.poolin.fi/#/exchange