Gavin Andresen’s ‘Fractional-Reserve Mining’: Cloud Miners Respond

In response to a Reddit post asking whether cloud mining contracts make sense, Andresen wrote the following: “No, they make no sense. I suspect many of them will turn out to be Ponzi schemes.”

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Gavin Andresen’s ‘Fractional-Reserve Mining’: Cloud Miners Respond

Last Thursday, Kyle Torpey at CryptoCoinsNews reported on a quote from Bitcoin developer Gavin Andresen that went largely unnoticed.

In response to a Reddit post asking whether cloud mining contracts make sense, Andresen wrote the following: “No, they make no sense. I suspect many of them will turn out to be Ponzi schemes.”

Then on Monday, six days later, Andresen posted the following on a Bitcointalk.org forum post about GAWMiners:

“I don't know nuthin about ‘cloud mining’ — so I've got a dumb question.

“How do you know that when you send money to a cloud mining place they are actually dedicating hardware to hashing for you? What stops them from practicing ‘fractional reserve mining’ — reselling the same hardware to eleven different people, and using the money coming in to pay Fantabulous Weekly Returns With Profitability Guaranteed?”

These are important questions for consumers, especially as they come down to a question of trust, which, as Torpey wrote, Bitcoin was designed to make obsolete.

“[C]ompanies who continue to force their customers to trust them will find it difficult to succeed in this highly competitive market,” he wrote in last Thursday’s CCN post.

Therefore, we reached out to a couple of cloud mining company owners whom CoinTelegraph has interviewed before to get their thoughts on how their businesses can overcome this trust gap.

Cloud Mining Companies Respond

“Gavin Andresen made some good points,” Jeremy Biggs of PB Mining said Tuesday night. “However, those points extend to every corner of the world of Bitcoin — a world where consumer protection is very hard to come by. We will continue to allow time itself to run its course of proving our trustworthiness in this market.”

In response to Andresen’s original “Ponzi scheme” comment from last week, Marco Streng from Genesis Mining invited him to Iceland to tour the company’s mining facilities.

Streng also reached out to us to share a couple of photos of the company’s third mining farm. That’s Jakov Dolic, the company’s head of sales, in the second photo.

-Genesis mining farm

- Jakov Dolic, Head of Sales

We then asked Streng to verify how his company does not practice “fractional reserve mining” and how consumers can verify this. Streng replied to CoinTelegraph via email:

“Practicing fractional reserve mining is at best a bet against your client (and at worst, a Ponzi scheme if you never intend to pay). In any way such an operation is a scam, because it does not hold its promise that mining really takes place. If such a company bets against its client it can (i) win the bet and earn a higher profit than an honest business (ii) lose the bet (and probably get insolvent). If you are anonymous then there is only an upside (and no downside).

There is no way for any mining company to prove that they really own the hardware.

At Genesis Mining we do our best to be as transparent as possible: we publish information about the company founders on our webpage, have a registered company and frequently appear at conferences all over the world. Furthermore, we publish pictures of our mining operation, to prove that we own huge amounts of hardware. And we invited Gavin to have a look at our mining farm (and drink a Bavarian beer with us – Gavin, it is delicious stuff!).”

All of this more or less confirms Andresen's initial thoughts: Some companies will prove to be Ponzi schemes, and some will prove to be legit. Proof is only a question of time, as there are incentives to be unscrupulous and incentives not to be. The difference is only one of those is a long-term strategy.

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