How Colocation Facilities Can Survive (and Even Thrive) in the Age of Blockchain

By making strategic adjustments to their standard operating procedures, colocation facilities can simultaneously capitalize on the ongoing crypto-mining craze and position themselves for the broader blockchain-driven future.

Cryptocurrencies have officially become mainstream: despite early skepticism, 70 percent of institutional finance executives now agree that cryptocurrencies are here to stay. In fact, Bitcoin, arguably the best-known cryptocurrency, is already being used to complete some 12,000 transactions per hour across 96 countries.

Much of this enthusiasm has been driven by the unique technology that’s behind cryptocurrencies like Bitcoin: blockchain. Among other things, blockchain technology offers revolutionary security and authentication protocols that are applicable to a wide range of online transactions, leading many to believe that blockchain-based tools will eventually play a pivotal role in nearly every industry with a digital footprint.

Blockchain’s immense, broad-based potential represents a major opportunity for data centers that are willing to adapt to the demands of hosting blockchain-based workloads. By making a few savvy tweaks to their approach, data centers—and colocation facilities in particular—can capitalize on the ongoing crypto-mining craze while better positioning themselves for the broader blockchain-driven future. What follows is an in-depth exploration of blockchain, crypto-mining, and the things colocation facilities can do to take advantage of this emerging market opportunity.

Blockchain Basics

In the simplest terms, a blockchain is a decentralized ledger in which information—a transfer of money, ownership of an asset, an individual’s identity, a contractual agreement, etc.—is authenticated by several devices.

Once these devices reach a consensus on the legitimacy of a new entry (or “block”), they append it to the existing chain. After a block has been added, there is no way for it to be disputed, altered, or removed. Since each block is created through the efforts of multiple unaffiliated nodes, no single entity is ever able to “own” or control a blockchain in its entirety. Consequently, blockchain-based technologies promise to reduce both the risks and, insofar as they render intermediaries such as banks and brokers redundant, the costs of online transactions.

While its association with the likes of Bitcoin has garnered it the most attention from the general public, the potential uses of blockchain extend far beyond the world of cryptocurrency. Indeed, in a 2018 PwC survey, 84 percent of executives reported that their company was at least somewhat involved with blockchain technology. In addition to smart contracts, many of these companies are using blockchain-based tools to streamline their operations and improve data sharing and data integrity across their organization.

However, for the time being, cryptocurrencies remain the biggest drivers of blockchain adoption. As long as this is the case, crypto-miners will continue to create a great deal of demand for power, computing capacity, and security assurances—demand colocation facilities are ideally positioned to meet.

What Is Cryptocurrency Mining?

What, exactly, is cryptocurrency mining? Every block on, for instance, the Bitcoin blockchain details a list of transactions, each of which has a unique timestamp and identifying “hash” that corresponds to the previous block in the chain. Generating these hashes is the role of a cryptocurrency miner.

Think of a miner as a recordkeeper. Each crypto-miner contributes to the security and integrity of a blockchain by validating transactions through the generation of compliant hashes. In short, they help add new blocks to a chain by running Secure Hash Algorithms (or “mining”). Miners need significant computing power to run these algorithms, as, by design, there is no way to efficiently predict a hash. Cryptocurrency mining relies entirely on trial and error, and as a result, many miners run their “rigs” around the clock. For each transaction they help verify, crypto-miners are awarded a small amount of cryptocurrency.

The computational power needed to support the crypto-mining process represents a significant market opportunity for colocation facilities. How significant? Consider this: in 2017, cryptocurrency-related companies were the largest group of users of IBM’s data centers. With PwC predicting that 10 to 20 percent of the world’s economic infrastructure will be running on blockchain-based systems by 2030, blockchain-related demand for reliable server infrastructure is only going to increase in the years to come.

Meeting Crypto-miners’ Needs

For colocation facilities to fully capitalize on the crypto-mining craze, they must provide crypto-miners with everything they need. Generally speaking, there are four things every crypto-miner must have to keep their operation going strong:

• Network: Hashes must be transmitted to multiple nodes of a decentralized cryptocurrency ledger as soon as they’re generated. This requires a fast, stable connection, and many miners prefer to operate over ultra low-latency networks.
• Hardware: Miners need high-powered hardware on which to run their mining applications. While, in theory, a conventional CPU could do the trick, most crypto-miners rely on either a more powerful graphics processing unit (GPU) or a system of preprogrammed application-specific integrated circuits.
• Power: Mining cryptocurrency requires an immense amount of power. Remarkably, Bitcoin mining alone currently accounts for nearly 0.1 percent of the world’s total energy consumption.
• Security: Many cryptocurrencies are high-value “products,” and while the blockchains on which they’re based are inherently secure, crypto-miners’ computing systems are not. As such, bad actors frequently target crypto-miners with DDoS attacks in an effort to compromise their rigs and hamstring their operations.

Once everything’s taken into account, getting a crypto-mining operation up and running can be an expensive proposition. Few upstart miners have the capital to build an IT infrastructure powerful enough to facilitate effective crypto-mining, which is why, if they’re willing to make a few strategic adjustments to their standard operating procedures, colocation facilities have the potential to become crypto-miners’ best friend—and reap the rewards of doing so.

Optimizing Colocation Facilities for Crypto-mining—and Beyond

There are three straightforward steps colocation facilities can take to align their offerings with crypto-miners’ most pressing needs.

1. Accommodate decentralized hosting

In a sense, decentralized hosting is the data storage equivalent of a blockchain. It allows individuals and small organizations to rent unused portions of their hard disks via P2P networks, and prevents a single powerful actor from claiming total control over domain-related web hosting. Decentralized hosting is often more secure, less expensive, and better-performing than traditional hosting, and as such, it tends to appeal to crypto-miners angling to achieve reliable security and performance without breaking the bank.

2. Agree to shorter-term leases

Despite considerable progress, volatility remains a defining characteristic of most cryptocurrencies. While blockchain technology is here to stay, it’s difficult to divine the future of crypto-mining—particularly as it pertains to specific cryptocurrencies. In light of this volatility, colocation facilities should consider breaking with common practice by offering short(er)-term leases to crypto-miners who need a great deal of immediate capacity to strike while the iron’s hot, but might not need any capacity in a year or two.

3. Offer more powerful hardware (think: GPUs)

As alluded to above, GPUs are better-suited to crypto-mining than traditional CPUs. Demand for GPUs has skyrocketed as crypto-mining has becoming increasingly popular, and colocation facilities need to think strategically about how to upgrade their infrastructure in ways that accommodate GPU-based servers and higher overall network traffic.

Ultimately, while it may only be a matter of time before the popularity of crypto-mining fades, the utility of the adjustments outlined above extends far beyond the cryptocurrency space. By accommodating decentralized hosting, agreeing to shorter-term leases, and offering more powerful hardware, colocation facilities are not only positioning themselves to capitalize on the crypto-mining craze, but are setting themselves up to support the many other blockchain use cases that are just around the corner.

Increasing the odds of long-term success by taking advantage of a short-term opportunity? That’s a win-win proposition.