The Effects Of Centralized Bitcoin Mining

Ilona Silberman - July 30, 2018

bitcoin mining centralization

Bitcoin sparked the revolution that made a significant advance towards web 3.0 possible, with a strong proof of concept for decentralization of money and transactions. Hundreds of DApps or Decentralized Apps have now appeared, and many different startups are now looking to wrest control from centralizing internet forces on every front. However, Bitcoin’s infrastructure is very centralized, with Bitmain, the Chinese Bitcoin mining giant, designing the ASIC chips that became a fixture of Bitcoin mining. So, how centralized are the infrastructures behind the decentralized web?

Defining Key Concepts

Let’s start with some definitions. What do we mean by “centralized” and “decentralized”? Decentralization is the process of dispersing functions or powers away from a central location or authority. The internet started out in the nineteen seventies as a decentralized network of computers. It quickly became a playing field for giant centralized actors that control the gateways to information and interaction between people at various levels.

Bitcoin broke that mold. Before cryptocurrencies like Bitcoin, all our transactions had to go through a central authority, i.e., a central bank or an institution from within the banking system. The central bank was also in charge of money supply. With the advent of cryptocurrencies, we outsourced trust in a central authority to computer code and eliminated the middleman. In fact, digital fiat transactions (our transactions with credit cards, for example) happen in a centralized database, this means that the information about who owns what is stored in the computer that belongs to a central authority – or worse, on a server that these institutions rent from other companies. With cryptocurrencies, information about who owns what is stored in a blockchain, which is a distributed ledger. This means that the information about who owns what is stored in millions of different computers that validate blocks in the chain for a reward. So with Bitcoin and other cryptocurrencies our transactions are decentralized.

What is Going on with Web 3.0?

Now, almost ten years after Satoshi Nakamoto introduced Bitcoin, people are talking about decentralization, not only as it relates to monetary transactions as in the example above, but as it relates to information on the internet. Startups are issuing ICO’s, or Initial Coin Offerings, as a way to fund their endeavors. We are seeing platforms for decentralized file sharing like Storj (a decentralized cloud storage company), and text editors like Graphite, a decentralized version of Google docs. The argument here is that although the internet was born out of a decentralized utopia, nowadays our information flows through the computers of only a few corporations. Facebook, Google and Amazon are glaring examples.

A few corporations hold on to all their users’ information. With the advent of blockchain, different startups are trying to free the internet once more, to decentralize the infrastructures that hold on to our value and information. These decentralized services could never dream of taking hold of their users’ data because for it to be up on a blockchain platform it must be encrypted.

How Decentralized are the Computer Infrastructures that Power the Web 3.0?

Paradoxically, the pioneer of this new decentralized web 3.0, Bitcoin, might have itself fallen into the trap of centralization. People started mining Bitcoin with their laptops. But the tougher the hashing algorithm gets the more Bitcoin mining evolves. Bitcoin mining has developed into a very centralized endeavor with a few giant corporations producing the hardware for Bitcoin mining, and mining activities themselves being carried out by only a few.

Bitmain designs the ASIC (Application-Specific Integrated Circuit) chip that has become a fixture in the Bitcoin mining industry. In March of this year, Ethereum prices fell because of rumors that Bitmain was developing an ASIC chip for Ethereum mining, thereby pushing for centralization on this blockchain as well. The E3 is now being sold and shipped around the world to mine on Ethereum.

Intel, a big silicon-valley corporation, developing a more efficient add-on to the ASIC chip according to Unblock, reaffirms the advantage that a few corporations have in terms of the production of the equipment needed to secure these decentralized blockchains.

Mining Centralization

But the centralization of the production of Bitcoin mining equipment and the equipment used to mine for other cryptocurrencies, is not as straight forward as it seems on the surface. Mining centralization falls into three categories. In the first we have the manufacturing of mining hardware falling into the hands of a few corporations, as described above, which don’t necessarily operate all the equipment they produce. Instead they sell it to other miners around the world.

This brings us to the second category of mining centralization: the corporations that operate the equipment that corporations like Bitmain produce. Within this second category we have a majority of hash power being controlled by a few companies, either directly or indirectly through smaller miners that join their pools. If we look at hash rate distribution we can see nineteen big groups in charge of Bitcoin mining with 20% of activity being done by – a pool controlled by Bitmain.

Pool mining brings us to the third category of centralization: geography. If we look at hash rate per country, we can see that a substantial chunk of Bitcoin mining is happening in China. The Chinese government wanted to crackdown on Bitcoin mining, but its success was partial at most. Nevertheless, this crackdown has forced miners to move their equipment elsewhere, with Canada, Iceland and other countries that have favorable weather conditions and relatively cheap electricity, emerging as alternatives.

Detrimental Effects of Mining Centralization

By now, it is clear that the pioneer of decentralization that sparked this web 3.0 movement suffers from daunting centralization itself. This centralization can lead to certain risky scenarios. If mining equipment is manufactured by a single company like Bitmain, we could see a scenario in which they include a backdoor or a kill switch in the chips to shut down a miner using a predetermined signal. Bitmain is also blamed for manipulating the price of its mining equipment through supply, which hurts decentralization in terms of who operates the equipment. At least some of the mining power is looking to shift away from China, preventing Bitcoin from falling into the sovereign territory of a government that has been hostile to it.

Decentralization on every front is needed, nonetheless. If hash power was mostly concentrated in a single pool, within a single country, this single pool could reject blocks from other miners and the authorities in that country could virtually shut the network down. Since difficulty adjustment takes 2 weeks, the perils of centralization are compounded because Bitcoin will not be able to react quickly enough to fend off panic, and the mempool would be flooded with transactions. It seems then that the enemy of centralization that Satoshi Nakamoto set out to defeat, is rearing its ugly head and threatening the first and most successful use-case for a truly decentralized network. This could have an adverse effect beyond Bitcoin.


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