Hardware startup 21, Inc. yesterday dropped the veil of secrecy on its Bitcoin-related business that has garnered a total of $121 million in funding from prominent tech investors including Andreesen Horowitz, RRE Ventures, Yuan Capital, Qualcomm Ventures, Khosla Ventures, Data Collective, and individual executives from a handful of Silicon Valley heavyweights.
21’s big idea: Develop a dedicated chip that can be embedded into millions of devices to automate the management of digital transactions, open up new types of business models for OEMs, and faciliate another form of connected device authentication and communication.
Bitcoin is the first widely adopted cryptocurrency, a form of digital money that does an end-run around government-backed currencies and centralized banking systems. Bitcoins are “mined” by computers performing complex calculations, and transactions are recorded in a distributed global ledger that’s maintained and verified by the collective work of all the computers involved. The underlying technology, the “blockchain”, has uses that stretch beyond economics and are especially interesting for the Internet of Things.
That’s why 21 co-founder Balaji Srinivasan wrote in a blog post that the company is “less concerned with bitcoin as a financial instrument and more interested in bitcoin as a protocol — and particularly in the industrial uses of bitcoin enabled by embedded mining.” He went on to describe a number of possible use cases, such as devices that generate their own revenue streams and conduct transactions without the user needing to set up payment accounts, or devices that could be sold at a discount to be paid back to the manufacturer over time in mined Bitcoins.
However, as many critics have attested, there appear to be a number of flaws in the concept. (We’ve reached out to the company for comment on the following issues, and will update if/when they respond.)
For one thing, “embedded mining” is far less efficient on small, battery-powered devices than it is in the massive computing facilities where most professional Bitcoin mining currently takes place. By some calculations, the tiny amount of value that a smartphone or IoT device could generate in Bitcoin would be as little as 1/10th the cost of the electricity used in mining—so a device that appears to generate Bitcoins from thin air would actually be obfuscating the cost in reduced battery life and a higher energy bill for the consumer.
Another issue is that large-scale distributed mining requires devices to join a “pool” where they receive a share of any profit from the collective effort—and it’s not clear whether users of embedded mining devices would have the option to join a pool of their choosing or would be forced into a pool controlled by 21 or by the device’s manufacturer, either of whom could skim a percentage of the profit. In the latter case, users would essentially be subsidizing corporate revenue streams by paying for the electricity costs of embedded mining. On the positive side, as more devices join in mining, the security of the entire Bitcoin network increases as a result.
So the focus on supposed profits generated by embedded mining devices glosses over the fact that from a purely economic perspective, this looks like a bad deal for users—especially when you consider that thousands of the microtransactions that will take place between smart, autonomous devices on the IoT could be paid for with just a few pennies’ worth of Bitcoin. There is no word from the company on if or how they might use Blockchain "sidechains" in the system.
21 seems to be betting that users will accept, ignore, or remain blissfully unaware of embedded mining’s actual costs in exchange for the benefits that its chips provide.
Those who are skeptical are left wondering: Instead of making a device that mines at a loss, why not simply include a secure “wallet” for storing and transacting Bitcoins, pre-load it with enough fractions of a Bitcoin to cover its expected usage lifetime, and build that into the retail price?
For now, 21 has a lot of momentum and backing, both financial and institutional. Its relationship with Qualcomm in particular bodes well for getting embedded mining chips mass produced and incorporated into devices. But as Srinivasan himself wrote: “Ultimately, though, it is the community of electrical engineers and computer scientists that will judge whether embedded mining technology solves their problems.”
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