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How to further decentralize Bitcoin

A look into the different vectors of hashrate centralization

Is Bitcoin mining centralized? Here’s all aspects to consider before answering that question

Concerns about hashrate centralization have always been around within the Bitcoin community. However, after the meteoric rise of enterprise-level mining and consequent government regulations around it, the debate has heated up.

Most importantly, with the evolution of the mining industry, the landscape has become more complex. As such, there are many different vectors to analyze when addressing hashrate centralization. Let’s look into them.

This article was written after the discussion on the “How to further decentralize hashrate” panel in Bitcoin2022.

Geographic hashrate concentration

Geographic centralization refers to a large number of miners being physically located in the same area or region, especially under the rule of one government or legal jurisdiction.

This scenario is fairly common in the mining landscape, since miners tend to settle down on locations that provide three concrete advantages:

  • Cheap electricity.
  • Favorable regulations.
  • Stable, proper infrastructure.

Wherever these three factors coincide, it’s likely to see miners setting up shop there. The mining surge in the United States — Wyoming and Texas in particular — are the clearest examples of this.

Geographic concentration poses a risk since those miners are subject to the resolutions and regulations imposed by that government or ruling institution. As such, it would only take the members of this institution to collude and shut down Bitcoin mining in the region.

That is why it’s important for Bitcoin to have a vast amount of miners distributed across several different regions and legal jurisdictions.

Power source dependencies

As we mentioned above, cheap electricity is one of the driving factors for miners to choose a base of operations. There is no mining without the necessary electricity to power the computers.

That said, even if these miners are under different legal jurisdictions, a centralization risk emerges if they source their electricity from the same facility or gird. When one generation plant provides power to a large proportion of the miners, it creates a dependency.

In this scenario, either the generation plant or the grid operator can single-handedly stop mining by flipping a switch and powering down the computers.

This is also a tricky situation to solve, since all power plants connected to the power grid are fundamentally centralized. Viable solutions include collaboration between miners and independent energy producers, legal protection for miners through politics, and self-generated electricity off grid.

Mining pool operations

Most miners point their hashrate to mining pools for enhanced profitability and stable payouts. However, by doing so, they renounce their decision-making power, yielding it to the pool operators, who choose the transactions and create the blocks.

Although they help miners improve their revenue, the concentration of decision-making power in just a few mining pool operators is a major concern and a significant centralization risk.

Indeed, the vast majority of Bitcoin hashrate is concentrated in the top ten largest mining pools, which are in turn managed by a small number of operators.

As a result, hypothetically speaking, it would only take these few people to collude and impose censorship on Bitcoin, either by excluding certain transactions or banning certain addresses.

More importantly, assuming all pool operators are honest, they’re still vulnerable to being coerced by central authorities to impose censorship.

Technological development and production

At the moment, only a handful of manufacturers build and sell the majority of ASIC miners in the market. These manufacturers provide most miners with their equipment, and thus affect a good part of the mining industry.

Since mining without these ASICs isn’t viable nor competitive, their providers represent a potential centralization point. Should these manufacturers choose to stop selling their computers to a specific miner, it’s unlikely that they would be able to compete with others to find blocks.

Additionally, and similarly to what happens with mining pools, governments and authorities could pressure these hardware manufacturers to prevent them from providing ASICs to particular miners who don’t comply with certain regulations or requirements.

As a result, it’s important that mining hardware manufacturers are well distributed across different legal jurisdictions under different authorities, providing different options for miners to acquire their equipment.

Hardware ownership and control

We could label this in the same category of mining pool operations since it’s essentially about controlling hashrate, which in turn means controlling decision-making.

With the advent of mining as an industry, several corporations have managed to acquire several thousands of ASIC miners, concentrating a significant amount of the total hashrate.

That said, even before pointing that hashrate to a mining pool, it only takes a handful of these organizations to reach 51% of the hashrate and gain control of the network.

However, there’s another aspect of hardware ownership by enterprise-level mining operations that is worth considering: many of these entities are publicly-traded. As such, these organizations have to comply with regulations and uphold shareholder’s interests, which may interfere with Bitcoin’s decentralization ethos.

How can we fight hashrate centralization?

Bitcoin mining centralization has several vectors to look at, as we saw in this article. And although none of these dimensions is sufficiently advanced to worry about, the evolution of the mining landscape over the last couple of years shows that we’re trending towards centralization rather than decentralization.

Some signs of this transition are the concentration of miners in the United States, primarily in large mining facilities equipped with thousands of ASICs; and the top ten pools accounting for over 90% of the total Bitcoin hashrate.

As a consequence, it’s crucial that we address these factors as soon as possible. In that regard, Lumerin provides a protocol that enables decoupling hashrate production from control, pushing for decentralization on the hardware ownership dimension.

In other words, the Lumerin Protocol will allow multiple decision-makers for the hashrate produced by a single mining facility. We believe this is a great step towards further mining decentralization, and remain very optimistic about the future of mining.

Special thanks to Shinobi and Bob Burnett, whose work inspired this article.

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