Let’s Start With Bitcoin’s Shutdown Price

Recently, with Mt. Gox starting to compensate Bitcoin and the German government frequently selling Bitcoin, the price of Bitcoin once fell below $54,000 (it has now rebounded above $60,000), touching the “shutdown price” of some Bitcoin mining machines.

According to research institutions, if Bitcoin reaches $54,000, only ASIC mining machines with efficiency exceeding 23W/T can be profitable, with only five models barely sustaining. This means that if Bitcoin’s price falls below the shutdown price, some smaller miners with less risk tolerance might seek to exit and cut their losses. When these miners exit, they often sell Bitcoin for cash and sell mining machines at lower prices, causing Bitcoin’s price to further drop, a phenomenon known as “Miner Capitulation.”

The so-called shutdown price is essentially the cost price of Bitcoin mining machines. How is this cost calculated? To answer this, we must first understand Bitcoin’s economic model and PoW mechanism.

Bitcoin is pre-programmed with a total supply of 21 million, with approximately one block mined every 10 minutes, rewarding miners with several Bitcoins. The reward started at 50 Bitcoins per block and halves every 210,000 blocks (approximately every four years). The most recent halving event occurred on April 23, 2024, at block height 840,000, reducing the reward to 3.125 Bitcoins per block. Besides block rewards, miners also collect transaction fees, typically ranging from 0.0001 to 0.0005 Bitcoins per transaction. Fees are market-regulated; the more Bitcoin transactions, the busier miners become. If transaction fees are set too low, miners might ignore those transactions.

When transactions occur on the Bitcoin network, they are placed in a memory pool (mempool). Miners then select a set of transactions from the mempool and attempt to form a new block. To do this, miners need to find a specific value in a random number and combine this value with the block data to generate a hash that meets the network’s difficulty target. This process is “mining,” and the first to compute a valid hash gets the bookkeeping right, i.e., successful mining. The difficulty target is dynamic, adjusting every 2016 blocks (approximately every two weeks) to maintain an average block time of 10 minutes. Therefore, the higher the total network hash rate, the higher the difficulty target.

The hash rate mentioned above is the mining capability of Bitcoin mining machines, i.e., how many hash collisions can be performed per second. The unit of hash rate is generally TH/s, or 10^12 hashes per second. The total network hash rate is approximately 630 EH/s, or 6.310^20 hashes per second. Therefore, each T of hash rate can theoretically mine 810^(-7) Bitcoins per day. For miners, costs include mining machine purchase and operation fees, primarily electricity costs. For example, the Antminer S19 pro has a rated hash rate of 110 TH and a rated power consumption of 3250 W, resulting in a daily power consumption of 0.709 kW per T of hash rate. Electricity costs vary significantly by region, and at 0.055 u/kW, the cost of mining one Bitcoin is approximately $50,000. Below is F2Pool’s Bitcoin mining data, which aligns closely with my estimates.

These assumptions are based on a total network hash rate of 630 EH/s. If “Miner Capitulation” occurs, the total network hash rate will decrease, and the cost of mining one Bitcoin will also decrease. Conversely, if Bitcoin’s price rises and miners find it profitable, the total network hash rate will increase, and the cost of mining one Bitcoin will also rise.

Therefore, Bitcoin’s “shutdown price” is actually the result of market adjustments and miner dynamics, all based on Bitcoin’s simple yet effective economic model.

Economic Model Under PoS

In the economic model of PoW blockchains, represented by Bitcoin, miners are the most important participants. However, in PoS blockchains (such as Ethereum and Solana), there are no miners. So, what does their economic model look like?

Firstly, we need to understand that the biggest difference between PoS and PoW mechanisms is that, under PoS, the nodes participating in consensus and block production have an admission mechanism, usually achieved through staking. In this mechanism, nodes need to stake a certain amount of the platform’s tokens to be eligible to participate in network consensus. At the same time, the platform will issue platform tokens to these nodes as block rewards to incentivize them to contribute to network stability. Nodes that participate in network consensus through staking are generally called validators.

Secondly, if the platform tokens are issued indefinitely (such as Ethereum and Solana), the inflation issue of the platform tokens needs to be considered. The issuance of platform tokens usually occurs through validator block rewards, and burning is generally done through transaction fees for liquidity recovery, such as being reclaimed to the project treasury or burned within the protocol. Issuance and recovery need to be balanced, allowing for inflation or deflation over short periods, but avoiding long-term inflation or deflation to maintain economic stability.

Finally, there’s the functionality of platform tokens. Unlike Bitcoin, which can only be used as transaction fees, PoS platform tokens have an interest-bearing function due to the staking block rewards. Therefore, some platforms also have delegated staking designs, which can reduce the circulating supply of platform tokens and help maintain economic stability. What we commonly refer to as liquid staking usually involves third-party protocols based on delegated staking, with APR coming from staking block rewards (and MEV).

Ethereum

The initial supply of the Ethereum network was 72 million, of which 60 million were allocated to people who participated in the crowd sale held in July and August 2014 (at an average price of about $0.30 per ETH), and the remaining 12 million were divided in half at the network launch in 2015, with one half given to the 83 early contributors to the protocol and the other half reserved for the Ethereum Foundation. The current total supply of the Ethereum network is about 120 million.

In September 2022, Ethereum transitioned from PoW to PoS (The Merge), initiating the Beacon Chain. The inflation design of the Ethereum network is divided into two stages: before the transition to PoS, approximately 4.84 million ETH were issued annually, with an inflation rate of about 4%; after the transition to PoS, approximately 3.01 million ETH are issued annually, with an inflation rate of about 2.5%. In practice, since Ethereum transitioned to PoS, due to EIP-1559 burning a portion of ETH as a base fee for each transaction, Ethereum has experienced deflation most of the time, with an average deflation rate of 1.4%.

In the Ethereum network, if a node wants to become a validator on the Beacon Chain, it needs to stake 32 ETH. Staking more than 32 ETH does not increase the validator’s weight on the network. Each epoch on the Beacon Chain has 32 slots, with each slot lasting about 12 seconds, generating one block. Ethereum distributes rewards by epoch, calculated from a base reward, which represents the average reward per validator under optimal conditions in each epoch. The proposer of the block can take 1/8 of the base reward, while the remaining rewards are distributed to voters (provided they vote in line with the majority of other validators) and participants in the sync committee. The reward allocation depends on the validator’s effective balance and the total number of active validators. For details on validator rewards, readers can refer to Ethereum’s Gaper consensus, one of the most complex designs in the Ethereum protocol.

Since staking Ethereum requires at least 32 ETH and does not support delegating ETH to other validators, and there is a 27-hour lock-up period for withdrawing staked ETH, these rules pose certain obstacles for stakers. Therefore, to provide a more user-friendly staking environment, liquid staking token (LST) protocols have emerged in the market. The principle is to pool ETH together to bypass the 32 ETH minimum requirement, with the staking pool handling the operations and providing users with staking certificates to participate in other DeFi applications, enhancing capital efficiency.

Lido, the industry leader in Ethereum’s liquid staking sector, has captured a significant portion of the Ethereum LST market. Lido allows ordinary users to stake any amount of ETH through the Lido platform, converting staked ETH into stETH, which can be exchanged for ETH at any time, addressing the pain points of native staking. Currently, 32.54 million ETH are staked in the Ethereum network, accounting for 27% of the total supply, with Lido contributing 9.8 million ETH, and stETH representing 30% of the staked ETH.

Solana

The initial supply of the Solana network was 500 million, of which 38% was allocated to the community reserve fund, 12.5% to team members, 12.5% to the Solana Foundation, and the remaining 37% to investors. The current total supply of the Solana network is approximately 580 million, with 460 million in circulation, resulting in a circulation rate of about 80%. The remaining 20% of SOL is locked by investors and the team, with the most significant unlock event occurring in March 2025, releasing about 45 million tokens.

Solana’s initial inflation rate was 8%, with an annual reduction rate of -15%, and a long-term inflation rate of 1.5%.

The Solana network does not have a minimum staking amount requirement for validators, but the voting power and staking rewards of validators are proportionally distributed based on their staked amount. The Solana network supports delegated staking, where users can stake their SOL to existing validators to share in the rewards. Delegated staking does not mean transferring SOL to the validator; SOL remains in the user’s wallet, making it as secure as holding them. There are currently 1,500 validator nodes, with an average APR of around 7%.

Validators perform the work of validating transactions and proposing blocks: whenever a validator submits a correct and successful vote (which itself is a transaction for which the validator pays transaction fees), they earn points. There are no additional points for proposing blocks; block rewards only include the transaction fees within the block, with 50% of the fees going to the validator as a block reward and the remaining 50% being burned. During a period, validators accumulate these points, which can then be “redeemed” for a certain proportion of SOL rewards at the end of the period. The “redemption” from points to rewards is equity-weighted, i.e., the validator receives a percentage of SOL corresponding to their share of total points (the sum of all validators’ points).

The state of LST (Liquid Staking Tokens) in the Solana network is significantly different from Ethereum. Over 80% of the circulating SOL in the Solana network is staked, much higher than Ethereum’s 27%. However, LST only accounts for 6% of the staked supply (compared to over 40% for Ethereum). The main reason is that the Solana network natively supports delegated staking, and the DeFi protocol ecosystem is still in its early stages, meaning that products like Lido on Ethereum do not have the same problems to solve on Solana. Jito is the leader in LST on the Solana network. Jito delegates users’ SOL to validator nodes that support MEV (Jito-Solana validator client) and converts it to JitoSOL, with MEV earnings distributed as additional rewards to stakers. Therefore, Jito’s platform APR is higher than delegated staking, currently reaching 7.92%, with JitoSOL accounting for 3% of staked SOL.

Conclusion

The economic model is the most important design for blockchains aiming for long-term operation, bar none. Compared to the simple and effective economic model of PoW blockchains represented by Bitcoin, the economic model of PoS blockchains represented by Ethereum and Solana is usually very complex—it needs to consider staking mechanisms, incentive mechanisms, inflation parameters, and token functions.

From the perspective of new blockchain economic models, the vast majority adopt the PoS consensus mechanism rather than PoW. The reasons for this, besides PoS being more energy-efficient, include better throughput and transaction confirmation times, allowing more transactions to be processed per second. Performance is the cornerstone of blockchain’s path to large-scale adoption.

At the same cost, PoS is also more secure and easier to recover from attacks. This is because validators are stakeholders: honest validators are rewarded, while malicious validators are punished. Of course, the largest stakeholders will receive the most returns, which can also lead to wealth concentration issues.

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