The always relevant Marty Bent had Spiral developer Matt Corallo on his podcast this week to address pressing issues surrounding Bitcoin mining.
To bring everyone up to speed, the concerns stem from recent blockchain research which found that some pools may have become a little too comfortable.
How do we know? Well, everyone’s favorite snooper the mononaut recently highlighted that an unusual percentage of Bitcoin’s mining reward was consolidated under the control of a single custodian.
How bad is it? Well, about 47% of the hashrate, on a good day. Yeah, pretty bad.
Now why in Satoshi’s name would they do such a thing, you ask?
CREAM
To start, have you looked at the hashrate chart recently? It is virtually indistinguishable from the US debt hockey stick. Buoyed by advances in hardware, public balance sheets, and increasing forays into cheap energy sources, Bitcoin mining has transformed into an arms race. Since the 2021 Chinese mining ban, the network’s hashrate has increased more than fivefold.
The effects this has had on miners’ margins are explicit. Everyone shakes hands. The recent bear market has seen numerous consolidations, particularly on the Western Front. At the pool level, Foundry has been the biggest benefactor with almost 25% of the current hashrate, up from 35% last year.
The reason they achieved such dominance so quickly is something Bitcoiners know well: volatility. In this case, we more often talk about variance. Others call it luck.
Luck, under the conditions described above, can make or break your business. This is why pools exist in the first place. Proof of work is a random process and randomness is the bane of cash flow. By combining your hashrate with others, you improve your chances and, perhaps, manage a more reliable source of income.
This is important because when your bills come due every month, your utility provider doesn’t care about your woes. The narrower the margins, the more vulnerable you are. In today’s competitive environment, it’s a matter of survival.
What does all this have to do with Foundry?
Well, it turns out that another way to smooth out miner income is to adjust your pool’s payment system and remove variance from the equation completely. How? Just pay them for their work no matter how often you mine a block. A process called FPPS (Full payment per share).
If that sounds expensive to you, that’s because it is. The pool must effectively pay each payment out of pocket and hope to be able to repay itself with the blocks it eventually mines. If you’re having a bad streak and your balance sheet isn’t strong enough to absorb the revenue shortfall, you’re fried Sam Bankman.
Enter the Foundry. Through a combination of uncanny timing, business acumen and a DCGA giant-sized war chest, they have created a financial moat around their pool operations, making it very difficult for smaller players to enter and compete.
Of course, it’s a bit more complex in practice, but that’s pretty much the gist.
Back to our little pool crew and the mysterious caretaker. Have you figured it out yet?
The same game is being played across the pond. It is very likely that Foundry’s emergence as a major player exacerbated the dynamics described above and forced smaller pools to capitulate.
The execution looks slightly different but it is essentially the same model. We can validate that multiple pools now share the exact same block patterns. This matches reports that Antpool offers white label services.
That’s right: proxy mining is, apparently, a business model.
On top of that, aggregating Coinbase’s results suggests that an even larger percentage of the hashrate appears to be funding their operations through the same provider.
In other words: a single entity writes the checks for almost half of the network’s hashrate.
A dollar bill, y’all.
If what you say is true. Shaolin and Wu-Tang could be dangerous
Predictably, this situation has led some talking heads to raise alarming questions about mining centralization. As a reminder, this is not the first time that mining has been clumsily consolidated.
It seems like every cycle there is a hubbub of apocalyptic mining centralization and, like clockwork, someone panics and says we should push the red button.
2008-2012 the advent of GPU/ASIC
Network latency between 2012 and 2016 led to GHash
2016-2020 Bitmain manufacturing monopoly
2020 to today…
-Alex B (@bergealex4) April 25, 2024
As I wrote in this week’s weekly reorganization, time is a flat circle. The centralized Proof-Of-Work Manbearpig comes out of his cave every cycle. This is a seasonal event.
What is rather unusual is that one of the most experienced developers in this field is making full use of DEFCON 1.
Now let’s work on a PoW change.
– Matt Corallo (@TheBlueMatt) April 26, 2024
I leave it to more serious media like the Bitcoin Bugle to speculate on the strange connections and coincidences between this explosion and recently announced mining ambitions.
Look, it’s not pretty. I think we can all agree that such a large portion of the hashrate being at the mercy of a handful of bankers is disgusting. Bitcoin’s security relies on miners aligning with their financial incentives. If this is the result, something is wrong and resistance to censorship is threatened.
The reaction, however, is unwarranted. Bitcoin mining has followed notable growth patterns throughout its history and this one is no different. This is a market governed by economics and not by code. Inefficiencies arise at each stage and are then mitigated as the industry progresses.
I understand that everything is a bug for the man at the keyboard but the current reality does not fit this framing.
Everyone applauds the work done in StratumV2 to optimize the mining interface, but it’s simply not an answer to our current situation. Although they can be personalized, transaction templates are still allowed. Pools can always reject any transaction they deem to be haram. Condescending the operators for their lack of interest in the solution and the miners for not demanding it borders on hubris.
Custom transaction selection cannot be relied upon to resist censorship. Only market mechanisms can realistically solve this problem and it turns out that Bitcoin is explicitly designed to be robust to mining majorities. By using fees, users create a financial incentive for competing miners to generate enough hashrate behind a transaction for it to be mined. Interestingly, this implies that, in a perfect world, all miners mine according to the same model: the most profitable.
In practice, things are a little more, shall we say…scary. As uncomfortable as it may be, censorship is inevitable. Following the events of this week, the writing is on the wall and while a lot of grief is being given to the Chinese miners, it seems that it is most likely coming from our side.
By far the most disappointing aspect of this turmoil is approval of a change to the proof of work algorithm. The threat that the state professes against us as we speak makes the talk about firing minors particularly aggravating. He is deaf and shows a total lack of discernment about the challenges that await us. Divide and conquer, anyone?
To make matters worse, we know that throwing the baby out with the bathwater is a recipe for disaster. Change the algorithm. “Fire the minors. » This achieves nothing.
Again, the technocratic mind is blind to any problem not resolved by a pull request.
By going scorched earth, you ensure that only the most well-capitalized participants will participate in your game. The hashrate can be erased with the flick of a key, but technical prowess and large enough bags can withstand the nuclear winter. The ASIC maker market is likely resetting to a single player, already specializing in custom algorithms. Monopolies love nothing more than good old interventionism to help eliminate competition.
From a consensus point of view, the idea is so absurd that it goes against the entire premise of the system.
If Bitcoin requires social coordination to quell the whims of the market and play with its incentives, it is a failed project. Proof of work is a cost-effective design, not a technical contraption you can fix with code.
Wu-Tang Financial
So, what do we think? Sit back and wait for the situation to get worse?
Well, I can only humbly suggest that we start considering addressing market dynamics with market solutions. Diversify your obligations!
From my understanding, the underlying problem is related to Bitcoin capital markets. Resourceful players who quickly understood the problem facing small-scale mining filled a void in the market and, until now, have left no room for anyone to operate. The economies of scale and perceived risks associated with mining have helped keep competitors at bay.
There is an opportunity here for a handful of ambitious players to balance this market and allow pools to find capital without kneeling in the face of larger competitors. This won’t happen overnight. Relationships need to be built and the general information asymmetry that has plagued this market needs to be corrected.
This is why we must stop burning bridges.
Of course, technical improvements can also be made to alleviate underlying variance issues, but they cannot remedy the growing pains of an immature market.
Bitcoin, by all accounts, is going through its adolescence. No one wants to be told what to do and pushing in one direction will inevitably lead to resistance. Sure, there may be no rhyme or reason to what some participants decide to do, but it’s not anyone’s place to decide for them.
This too should pass. Until there…
The Wu-Tang clan is none of your F’ Wit
