Is Bitcoin Mining ‘Dangerously Centralised’? What New Research Shows

Recent
findings
from
BitMEX
Research
have

reignited
concerns
about
the
centralization
of
Bitcoin
mining.
Their
study,
which
cites
insights
from
Bitcoin
analyst
Alex
Bergeron,
points
out
that
a
single
entity
now
controls
the
Coinbase
outputs
for
approximately
47%
of
the

network
hashrate—a
significant
concentration
that
suggests
a
shift
toward
oligopolistic
tendencies
within
the
Bitcoin
mining
ecosystem.

Bergeron,
who
has
previously
addressed
issues
of
centralization,
highlights
that
this
trend
may
be
driven
by
mining
pools
altering
their
payout
schemes
to
reduce
variance.
This
adjustment
makes
such
pools
more
attractive
and
competitively
dominant.
Bergeron’s
observations
are
supported
by
data
from
@mononautical
on
Twitter,
showing
that
prominent
mining
pools
like
AntPool,
F2Pool,
and
Binance
Pool
have
their
Coinbase
addresses
managed
by
a
single
custodian.

A
single
custodian
now
controls
the
coinbase
addresses
of
at
least
9
pools,
representing
47%
of
total
hashrate.

As
demonstrated
by
this
consolidation
of
mining
reward
outputs
from
AntPool,
F2Pool,
Binance
Pool,
Braiins,
btccom,
SECPOOL
and
Poolin:https://t.co/IQpH2TgP6k

https://t.co/w5Nk09Rawf

pic.twitter.com/6RDHdm0ZjP

—
mononaut
(tx/acc)
(@mononautical)

April
9,
2024

Why
The
Bitcoin
Mining
Network
Is
In
A
Poor
State

The
BitMEX
Research
team
expanded
on
these
insights
by
exploring
the
economic
implications
of
this
centralization.
According
to
their
report,
“Only
around
$20
million
of
capital
might
be
required
to
undertake
such
variance
smoothing
operations,
a
relatively
small
amount
given
the
vast
scale
of
the

Bitcoin
mining
industry.”
This
finding
suggests
that
the
centralization
issue
might
not
stem
primarily
from
economic
incentives
related
to
revenue
variance.

To
substantiate
their
findings,
BitMEX
Research
constructed
a
model
to
simulate
the
operations
of
a
large-scale
Bitcoin
mining
pool
with
the
intent
of
eliminating
payout
variance.
The
model,
although
simplified,
uses
basic
probability
and
financial
theories
to
forecast
the
outcomes
of
daily
mining
operations,
assessing
the
sustainability
of
a
reserve
fund
under
varying
levels
of
network
hashrate
participation.

“Our
simulations
show
that
with
an
initial
reserve
fund
of
300
to
400
Bitcoins,
a
mining
operation
can
remain
economically
viable
over
a
year,
even
if
adverse
conditions
prevail,”
the
study
elaborates.
The
results
indicate
that
while
a
larger
pool
with
a
significant
share
of
the
hashrate
would
require
a
larger
fund
to
maintain
operations,
the
overall
capital
needed
is
still
within
reasonable
limits
for
major
players
in
the
industry.

Despite
these
financial
insights,
the
implications
of
such
centralized
control
are
vast,
touching
on
issues
beyond
mere
economic
mechanics.
The
control
of
nearly
half
of
the
network’s
hashrate
by
one
entity
not
only
challenges
the
principle
of

decentralization
that
is
central
to
Bitcoin’s
ethos
but
also
introduces
significant
risks
related
to
network
security,
potential
price
manipulation,
and
the
integrity
of
transaction
verification
processes.

The
report
provokes
a
critical
discussion
within
the
Bitcoin
community,
shifting
focus
from
the
technical
feasibility
of
managing
large-scale
mining
operations
to
the
broader
strategic
and
philosophical
challenges
posed
by
such
centralization.

“This
level
of
centralization
can
act
as
a
double-edged
sword.
While
it
may
contribute
to
economic
efficiency
and
stability
in
mining
operations,
it
also
places
an
enormous
amount
of
power
in
the
hands
of
a
few,
potentially
undermining
the
trust
and
decentralized
nature
that
Bitcoin
was
built
upon,”
the
BitMEX
Research
concludes.

The
Community
Needs
To
Act
Now

As
the
debate
unfolds,
it
becomes
clear
that
the
community
needs
to
consider
more
than
just
the
economic
and
operational
implications.
There
is
a
growing
call
for
structural
reforms
within
the
mining
sector,
aimed
at
preventing
excessive
centralization
and
ensuring
the
long-term
health
and
integrity
of
the
Bitcoin
network.

Addressing
these
challenges
requires
a
concerted
effort
from
all
stakeholders,
including
miners,
developers,
and
regulatory
bodies,
to
devise
and
implement
mechanisms
that
maintain
competitive
fairness
and
uphold
the
decentralized
foundation
of
Bitcoin.

“The
Bitcoin
mining
network
appears
to
be
in
a
pretty
poor
and
centralized
shape,
with
a
single
entity
custodying
the
Coinbase
output
funds
for
almost
50%
of
the
global
hashrate.
[…]
It
is
clear
that
this
is
a
real
problem,”
BitMEX
Research
concludes.

However,
the
firm
also
presents
a
silver
lining:

The
positive
news
is
that
the
level
of
capital
a
pool
operator
needs
to
smooth
out
the
impact
of
luck
is
not
as
large
as
some
people
might
think,
perhaps
around
$20
million
to
$40
million.
Therefore
while
the
issue
is
a
problem,
it
may
not
be
critical.
It
does
not
feel
that
this
luck
issue
is
therefore
the
only
fundamental
long
term
cause
of
this
apparent
monopolistic
structure.

At
press
time,
BTC
traded
at
$62,889.

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