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Optimizing Data Centers to Meet the Needs of Cryptocurrency Miners

Data centers are the twenty-first century nexus between the commercial real estate and telecommunication business sectors. Owners, operators and developers of data centers face the difficult task of continually adapting to the rapidly evolving priorities of their ever expanding clientele in order to remain competitive and appealing to the largest number of actual and potential consumers. Cryptocurrencies based on Blockchain-secured transactions have been thrust into the public eye and have become the face of next generation investment opportunities with the spectacular rise and fall of the value of Bitcoin and Ethereum (among others). This post provides a glimpse into how data center owners, operators and developers can optimize their facilities by dedicating data centers with low overhead (achieved primarily by reducing cooling, redundancy and security expenses) to the exponentially growing cryptocurrency mining industry. A full length article will follow this post in the next few months with a more detailed analysis of the vastly contrasting needs of digital vaults or wallets storing coins of cryptocurrency.

In order to understand the priorities of cryptocurrency miners, a brief primer on cryptocurrency and mining is necessary. The primary focus of cryptocurrency miners is computational power and energy efficiency, not the redundancy or physical or digital security that traditional data centers focus on. New units of cryptocurrency, typically called coins, are not minted; they are “mined” by solving a complex mathematical puzzle known as the “nonce” through a massive computational trial and error process. Each nonce is tied to a “block” that contains information identifying a group of transactions. When a nonce is solved by a mining computer, and the solution is verified by a majority of other miners, the block is authenticated and it (and the underlying transactions) are added to the virtual ledger, or “chain” of verified transactions (hence the term “Blockchain”) with an identifying number called a “hash” calculated based on all the data in the block. Any change to the underlying transactions within a block will cause its hash to change, and accordingly, the Blockchain will be broken and the tampered block will be readily identifiable.  Each block also identifies the hash of the block that precedes it when it is authenticated, hence the “chain”. A Blockchain is a distributed network and does not exist in any one place; the official Blockchain is what a majority of those with copies of the chain agree is accurate.

The first (and only the first) miner that solves a nonce is compensated with a predetermined number of coins. Accordingly, maximizing computational power while reducing the overhead of energy costs are paramount to miners. Finding inexpensive sources of energy are essential to the future of cryptocurrency mining. The redundancy of the Blockhain being stored on the servers of all miners, all but eliminates the importance of redundancy – downtime is not fatal, merely an annoying temporary interruption.

The sheer computational power necessary to solve a single nonce and authenticate a block, the ease of identifying fraud by a break in the Blockchain, and the redundancy of the authenticated Blockchain, makes Blockchain inherently secure. It does not rely on traditional private key access. The process of mining does not involve the storage, but rather the production, of coins. Accordingly there is minimal risk to miners due to hacking or downtime (other than the opportunity cost). Cryptocurrency miners would prefer lower overhead to traditional data center security systems and protocols.

On the other hand, other parties to Blockchain and cryptocurrency transactions, such as cryptocurrency exchanges, traders and custodians, do require redundancy and security and need traditional data center space.

To data center owners, operators and developers, there are three main takeaways from the foregoing: (1) miners prioritize computational power above all else; (2) the secure nature of the Blockchain itself makes physical and digital security of data centers housing cryptocurrency mining operations less of a concern to miners; and (3) cryptocurrency exchanges, traders, custodians and others dealing with cryptocurrency will still require traditional data center space.

Please look out for additional articles coming soon that will take a deeper dive into Blockchain and the cryptocurrency industry as they relate to commercial real estate transactions and data centers.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume VIII, Number 108
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About this Author

Jeffrey A. Moerdler, Real Estate Attorney, Mintz Levin, Law Firm
Member

Jeff is the head of the Real Estate and Communications practices in New York. A general commercial real estate attorney for almost 30 years, his clients include large national companies, particularly in the high-tech, telecommunications, financial services, health care, supermarket, and oil and gas sectors as well as numerous smaller local clients.

212-692-6700
Gregory Jaske, Mintz Levin Law Firm, New York, Real Estate and Construction Law Attorney Real Estate Construction Real Estate, Construction & Infrastructure Public-Private Partnerships
Associate

Greg’s primary focus is on the Real Estate and Construction Practices. He has significant broad-based experience counseling and guiding real estate developers, property owners, and lenders through all aspects of real estate and construction matters. This experience includes acquisitions, dispositions, joint ventures and structuring, leasing, lending, borrowing, development agreements, property management, due diligence, and confidentiality agreements. Greg also routinely assists with the real estate components of a wide variety of M&A transactions.

Prior to joining Mintz, Greg...

212-692-6276
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