Recent findings from BitMEX Research have relit concerns about the centralization of Bitcoin mining. Their study, which cites insights from Bitcoin analyst Alex Bergeron, highlights that a single entity now controls Coinbase’s outflows for about 47% of the market. network hash rate– a significant concentration which suggests an evolution towards oligopolistic tendencies within the Bitcoin mining ecosystem.
Bergeron, who has previously addressed centralization issues, points out that this trend could be driven by mining pools changing their payment systems to reduce variance. This adjustment makes these pools more attractive and competitively dominant. Bergeron’s observations are supported by data from @mononautical on Twitter, showing that major 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 the total hashrate.
As demonstrated by this consolidation of mining reward results from AntPool, F2Pool, Binance Pool, Braiins, btccom, SECPOOL and Poolin:https://t.co/IQpH2TgP6k https://t.co/w5Nk09Rawf pic.twitter.com/6RDHdm0ZjP
– mononautical (tx/acc) (@mononautical) April 9, 2024
Why the Bitcoin mining network is in bad shape
The BitMEX research team took this knowledge further by exploring the economic implications of this centralization. According to their report, “only about $20 million in capital might be needed to undertake such gap-smoothing operations, a relatively small amount given the scale of the problem.” Bitcoin mining industry.” This finding suggests that the problem of centralization may not arise primarily from economic incentives linked to income variation.
To support their findings, BitMEX Research built a model to simulate the operations of a large-scale Bitcoin mining pool with the goal of eliminating payment discrepancies. The model, while simplified, uses basic probabilistic and financial theories to predict the outcomes of daily mining operations, assessing the sustainability of a reserve fund under different 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 for a year, even if unfavorable conditions prevail,” the study states. 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 required remains within reasonable limits for major players in the industry.
Despite this financial knowledge, the implications of such centralized control are broad and touch on issues beyond simple economic mechanics. The control of almost half of the network hashrate by a single entity not only calls into question the principle of decentralization this is central to Bitcoin’s philosophy, but also introduces significant risks related to network security, potential price manipulation, and the integrity of transaction verification processes.
The report provokes critical discussion within the Bitcoin community, shifting attention 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 this can contribute to the economic efficiency and stability of mining operations, it also places a huge amount of power in the hands of a few, which could undermine the trust and decentralized nature that Bitcoin was built on. », concludes BitMEX Research.
The community must act now
As the debate unfolds, it becomes clear that the community must 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 by all stakeholders, including miners, developers and regulators, to design and implement mechanisms that maintain competitive fairness and support Bitcoin’s decentralized foundation .
“The Bitcoin mining network appears to be in a rather poor and centralized state, with a single entity owning Coinbase’s production funds for almost 50% of the global hashrate. (…) It is clear that this is a real problem,” concludes BitMEX Research.
However, the company also has a positive side:
The good news is that the level of capital a pool operator needs to mitigate the impact of luck is not as large as some might think, perhaps between $20 million and $40 million. Therefore, even if the problem is a problem, it may not be critical. She therefore does not consider that this question of luck is the only fundamental long-term cause of this apparent monopolistic structure.
At press time, BTC was trading at $62,889.
Featured image created with DALL·E, chart from TradingView.com
