Cryptocurrencies

Bitcoin (BTC) mining is now in the hands of the few. Acquired well-known mining complexes

Bitcoin (BTC) mining is now in the hands of the few. Well-known mining pools have gained overwhelming power, posing an existential threat to the world’s first digital asset. It is the logical result of a flaw in Satoshi Nakamoto’s design.

Unfortunately, Bitcoin mining has always tended toward centralization. Bitcoin miners can mine blocks using CPUs on personal computers because there are fewer miners and thus a lower overall hash rate. This evolved into GPUs around 2010 and into application-specific integrated circuit (ASIC) miners in 2012. ASICs eventually gave rise to massive mining companies that filled warehousing with hundreds or thousands of rigs.

Miners who control a larger percentage of the Bitcoin network hash rate are more likely to mine blocks and receive a Bitcoin block reward – the financial incentive for validating transactions and adding them to the Bitcoin blockchain. This is why small-scale miners often join a mining pool alongside others who run their own ASIC hardware. These miners earn in proportion to the amount of computing power they contribute to the mining pool network.

AntPool and Foundry USA control more than 50% of Bitcoin’s hash rate

Mining pools form a central influence on the Bitcoin network. Large mining complexes benefit from economies of scale. In general, larger complexes have more efficient operations. Even more worrying is that a mining pool that controls more than 50% of the Bitcoin network hash rate could initiate a 51% attack on the network.

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However, mining pools have come to dominate the Bitcoin mining industry. Small and medium-sized miners give their power to a pool to minimize costs and maximize revenues. Over the years, Bitcoin mining pools have become more centralized and subject to censorship. For example, the two largest mining pools, AntPool and Foundry USA, require miners to go through “know your customer” protocols.

Percentage of Bitcoin hash rate controlled by the largest mining pools as of May 15, 2024. Source: HashrateIndex.com

These two pools controlled nearly 50% of the network’s hash power in February, but their share had increased to 56.4% as of May. This gives them a much greater ability to monitor transactions – by refusing to confirm them – in the blocks they mine.

F2Pool has already monitored the transactions

Miners have already been monitoring transactions – from Bitcoin addresses sanctioned by the Office of Foreign Assets Control (OFAC), a financial intelligence and enforcement agency of the US Treasury Department.

The prime example occurred in September and October 2023, when Bitcoin 0xB10C developer’s personal project, Miningpool-observer, discovered that the F2Pool mining pool had failed to validate six transactions from addresses subject to OFAC sanctions. It was found that four of the transactions may have been intentionally liquidated, making F2Pool the first pool to comply with OFAC sanctions.

In response to 0xB10C, F2Pool co-founder Chun Wang wrote in a now-deleted tweet, “Why are you surprised when I refuse to confirm transactions to these criminals, dictators and terrorists? I have every right not to confirm any transactions from Vladimir Putin and Xi Jinping, right?

Bitcoin (Btc) Mining Is Now In The Hands Of The Few. Acquired Well-Known Mining Complexes
Chun Wang, co-founder of F2Pool, wrote in a now-deleted tweet: “Why are you surprised when I refuse to confirm transactions for…criminals, dictators and terrorists?” Source: X

Wang later tweeted that F2Pool “will disable the submission filtering patch for the time being, until the community reaches a more comprehensive consensus on this topic.”

Can we trust that Wang and other miners will not abuse their power to censor other users? No, Bitcoin exists so there is no need to trust it. Moreover, the need for such measures is minimal, because they are simply ineffective. Bad actors can simply create new Bitcoin addresses when needed. Worse still, they may switch to the theoretically more private Monero coin, making it more difficult for regular law enforcement agencies to monitor them. (In this particular case, the transactions were final Certain By other miners.)

Related: Here’s Why U.S. Debt Is Out of Control — and Japanese Debt Isn’t

0xB10C also claimed that mining pools are more centralized than people think, with AntPool controlling nearly 50% of Bitcoin’s total hashing power. Bitcoin developer Matt Corallo acknowledged his colleague’s findings, writing on X that mining centralization is having an impact on Bitcoin and “arguably destroys the long-term value proposition of Bitcoin itself.”

Bitcoin (Btc) Mining Is Now In The Hands Of The Few. Acquired Well-Known Mining Complexes
Bitcoin developer Matt Corallo addressed this issue in a post dated May 4, 2024 on X. Source: X

If one group controls 51% of the Bitcoin mining power, it can censor transactions and double spending, which happens when the same Bitcoin is spent more than once. The US government or the Chinese government could put pressure on these large mining companies to exclude transactions from Bitcoin blocks.

As if a lot of centralization in the mining pool itself wasn’t enough, BlackRock has its tentacles all over Bitcoin mining after investing in several major miners, including Marathon Digital, Cipher Mining, and Terawulf Inc. It is possible that Wall Street will exert its influence on the Bitcoin mining index in a similar way to the way that the “Big Three” – BlackRock, State Street, and Vanguard – exert their influence on the stock market.

Bitcoiners must start fighting back

The consolidation of mining pools is a worrying trend. However, Bitcoin is too valuable for all participants to fail. Node operators, small blockers and “commoners” will prove too powerful for any central power to control.

The Bitcoin community can combat this consolidation by running as many independent nodes as possible. Nodes can choose any pure chain in case the Bitcoin mining pool launches a 51% attack on Bitcoin. ASIC owners help prevent the mining pool from attacking Bitcoin by directing their mining rigs to a different mining pool. If you’re running an ASIC device, refrain from pointing it to the larger pools — like AntPool or Foundry USA — that require you to provide personal information anyway. Every mining pool could lose business this way, which would go a long way toward dissuading malicious behavior.

Kadan Stadelman He is a guest author at Cointelegraph and CTO of Komodo. He graduated from the University of Vienna in 2011 with a bachelor’s degree in information technology before joining the Berlin Institute of Technology for technical informatics and scientific computing. He joined the Comodo team in 2016.

This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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