Proof of Space May Crush the Storage Market

2   Li ke

As I reported in my last post, the introduction of the Chia Coin cryptocurrency has literally exploded
the storage market. The reason behind this is that It relies on a linked blockchain of mathematical
constructs based on a proof of having storage space (Disk or SSD) over a time period. This is said to
be less demanding in electricity supply than popular crypto currencies like bitcoin and ether, which
relies on a proof-of-work which requires large amounts of CPU processing. The demand is being
driven by “farmers” (the equivalent to miners in bitcoin) who earn Chia Coin when they are selected
to propagate the block chain. When the blockchain broadcasts a challenge for the next block,
farmers will earn a reward if they have a hash that is closest to the challenge in a plot. A farmer's
probability of winning a block is the percentage of the total space that a farmer has compared to the
entire network. The more plots, the higher the probability. In this way farmers are incented to buy
up storage to increase their chances of winning Chia Coin. What kind of demand does this create?

Since the Chia network was introduced in May, disk drive maker Seagate has upped its revenue
forecast for the current quarter, with its CFO telling investors there has been “an increase in the
crypto farming demand.” In the beginning of June, Seagate increased its Q4 revenue and EPS
expectations via an SEC filing. Having previously expected revenues of $2.85bn (give or take $150m),
it now expects them to be $2.95bn (+/- $150m), a $100m uplift. Expected EPS will also jump, from
$1.60 +/- $0.15 to $1.85 +/- $01.5 – a $0.25 increase. The Chia demand should positively impact all
HDD suppliers. That means Western Digital and Toshiba should benefit as well.

Unfortunately that means that the availability of disk space for real productive work will be impacted
by Farmers who are seeking to get rich on the crypto currency craze.

The attraction of Chia is the use of a block chain proof that is known as proof of space, as opposed to
proof of work employed by Bitcoin and other cryptocurrencies. Proof of work is an extremely
inefficient way to conduct transactions, requiring pools of high transaction processors which
consumes a staggering amount of energy as shown here from Forbes.

The energy efficiency and lower cost of Chia’s proof of space approach will incent other crypto
currencies to adopt this approach. There are already other coins that use proof of space, like
BurstCoin, Storj and SpaceMint. What if large players like an AWS or a Chase, or a sovereign state
decides to establish a crypto currency using the proof of state approach? How much storage will be
sucked up by these crypto farmers and how much will be left to run the data needs of the rest of the
world?

Building storage devices is not an easy task. It is not like building software. It takes raw materials,
manufacturing, rare earth metals, water and time. Crypto currencies will have a major impact on the
availability of storage as farmers and miners chase these currencies by buying up available storage
space. Unfortunately, the value of block chain lies in its distributed ledger which relies on the public
in the form of miners and farmers to propagate the blocks for reimbursement. As storage demand
increases for other productive uses like AI, and IoT, they will be in stiff competition for storage now
that the proof of space has been unleashed.