Only two pools mined over 50% of Bitcoin’s blocks at the end of December — should we be concerned?

Diving into the different layers of Bitcoin’s centralization risk

The last two years have been full of revelations about the core functioning of the Bitcoin mining industry.

First, China’s crackdown on cryptocurrency mining led to the — surprisingly fast — relocation of around half the total Bitcoin hashrate. Back then, we started seeing how important the geographic aspect was for the industry.

With North America becoming the new global hub for this type of activity, several other developments gained new relevance. From miners partnering up with energy companies to reduce their costs and scale up their operations to them turning off their entire mining fleet to give power back to the grid during extreme weather conditions. The industry became more complex.

Furthermore, last year also brought new insights on mining economics, albeit not so happy ones. The market downturn led to a massive profitability drop that delivered a heavy blow to most miners, who had contracted debt to expand their operations merely months before.

The entire landscape changed, with many of the sector’s biggest players going out of business. These developments led to a significant event: Over the last two weeks of December 2022 — roughly the length of a mining epoch — only two mining pools created over 51% of Bitcoin’s blocks.

Let’s dive into this situation.

Hashrate concentration in mining pools

A recent article published by CryptoSlate revealed that Foundry USA and Antpool were responsible for the production of more than half of Bitcoin blocks in the second half of December.

“Since mid-December, Foundry USA mined 357 blocks, while Antpool mined 325. Foundry’s block production accounted for 26.98% of the network, while Antpool was responsible for just under 24.5% of the total block production.”

As impactful as it may seem, it shouldn’t be a surprise that this happened. These two pools account for virtually half the total hashrate of the Bitcoin network.

Foundry became the top Bitcoin mining pool as a consequence of the massive miner exodus from China to North America, while Antpool is operated by Bitmain, one of — if not the largest ASIC miner manufacturers in the world.

Should we be concerned?

Over the years, Bitcoin mining has become an industry of itself. The corporatization of mining has led to its increasing centralization, with a small number of mining pools controlling the majority of the network’s computational power.

The concentration of hashrate in a few pools, especially those controlled by a single entity, increases the risk of a 51% attack, where a group of miners could theoretically manipulate the blockchain for their own gain.

However, it’s important to note that while this is a possibility, it’s highly unlikely. First of all, because miners would have to collude against their own interest. Many mining companies have invested millions of dollars in their operations, which would go to waste should Bitcoin fail.

Secondly, although it’s the mining pools who control block creation, nothing stops miners from switching to another one as soon as they see suspicious activity. That would greatly reduce the pool’s hashrate and, therefore, its power over the network.

Nevertheless, that doesn’t mean the Bitcoin community shouldn’t take action. Even if miners behave honestly, these centralization vectors represent vulnerabilities that outside agents could exploit. For example, governments where these pools are registered could pressure their operators to exclude transactions from certain wallets, implementing censorship over the network.

But what exactly can we do to prevent this? Most miners are profit-driven, and they’re free to point their hashrate to the most profitable pool. So, what are our options?

Decentralizing hashrate control

The centralization of the Bitcoin mining industry is a complex issue with no easy solutions. Plus, it’s composed of many different layers, including:

• The total amount of hashrate on the network.
• Where the physical miners are located.
• Who or what provides the power to run the miners.

However, perhaps the most important vector in this particular topic is the matter of who controls the hashrate.

Remember, when miners point their computing power to a mining pool, they’re giving up their “vote” on the network’s governance to them in exchange for revenue, and it is the mining pools who actually create the blocks with the miners’ hashrate.

That’s why we believe that in order to keep Bitcoin decentralized, we need a better distribution — not of hashrate creation, but of its control.

As we mentioned, corporate miners currently point the entirety of their hashrate to one mining pool for convenience and profitability. This leads to having only one decision maker — the pool in question — for that tremendous amount of hashrate.

Now, imagine if, instead, miners could break their compute power into several hundreds of contracts and point them to multiple pools. They would be enabling the creation of many different decision makers, contributing to the decentralization of the network. But this is extremely cumbersome to manage.

That’s why we’re building the Lumerin Hashpower Marketplace. A decentralized, peer-to-peer platform that enables seamless hashrate exchanging.

Through the platform, miners will be able to “pack” their hashrate into contracts of different amounts and duration that they can offer to sell on the open market. And most importantly, they can set the price themselves so they know exactly how much they’ll earn from their hashrate.

Similarly, users will be able to browse the marketplace, purchasing these contracts and effectively mining Bitcoin with someone else’s hashrate.

The decentralization of hashrate’s control is crucial for the overall health of the Bitcoin network, and we need to actively work towards keeping it distributed. We believe the Lumerin Hashpower Marketplace is a step in that direction.

Interested? Learn more about it at lumerin.io