To thoroughly examine and understand what mining centralization is, we may need to explore some scenarios to be able to understand the risks, how it plays out, and of course, its implications.
Mining Centralization Explained
Some “experts” will argue that bitcoin is somehow centralized while others will maintain that it is decentralized. No matter your stand regarding bitcoin mining, we are going to explore centralization in depth.
Now, the most common meaning of mining centralization is “a single company or miner controlling the majority of hash power in a bitcoin network.” The other definition could easily be ” a single company handling the manufacturing of bitcoin mining equipment.” However, in the context of ” mining centralization,” the two definitions are different because it is not always clear what exactly you mean by saying those words, right?
The best part is that we are about to examine several scenarios here, though not comprehensive, at least you should be able to understand the risks and mitigations due to mining centralization.
Centralization in Equipment Production
Bitmain does produce mining equipment and proof-of-work (PoW) hashing algorithm for BTC and a few others. What this means is that technically, the majority of hash power found on the Bitcoin network emanates from equipment from Bitmain. However, while Bitmain controls the manufacturing of most mining equipment that we have around, they don’t necessarily control the equipment. Do you get the idea?
But it is also true to say that there are risks due to a single manufacturer controlling the production of a majority of the equipment in a bitcoin network.
The Backdoor Scenario
The first scenario is: What would happen to suppose Bitmain disposes of most of the miners they manufacture?
The risk due to this scenario could be that Bitmain has put in some backdoor to the mining equipment. We are talking about some firmware, hardware, software, and such jokes. If that is the case with a majority of the equipment, then this could mean that there’s a likelihood for the equipment to:
- Shut down the equipment using a Kill-switch
- Override block templates to reward Bitmain-related pools
- Cause the miner to point to a Bitmain-related mining pool
- Ignore PoW unless the miner points to a Bitmain-run mining pool
If a piece of given equipment has fatal defects, then you can expect it to provide a wrong timestamp, maybe. Or it could even create invalid mining blocks!
Buying Restrictions/ Shipping Delays/ Additional Costs
A manufacturer can decide to take advantage of its monopoly to increase the price of the equipment any time they desire. Buying restrictions and delays in shipping can hurt sales and competition big time.
Centralization of Hash Power
The most dangerous scenario is the centralization of hash power. This is whereby one company controls 51%+ of the bitcoin network power. In this case, such hash power potentially harms “small” miners because it rejects mining blocks from everyone else to reward themselves. Also, they can try to double-spend or even throw away valid PoWs they don’t like.
To better understand this concept, imagine what would become of a bitcoin network whose majority that controls about 70% of the total hash power, decides to launch a block rejection attack. Such an attack would easily cause all bitcoin owners to sell their coins. Worse still, such an attack would cause a temporary degradation of the bitcoin network.
The majority hash power can opt to turn off the hash power. You see, there are way many tricks to attack a network and have influence, and this is one way! , the majority with, say, 80% of the total hash power can refuse to mine to pile pressure for a particular network feature. In other terms, this would quickly come across as some hunger strike.
However, this scenario is a bit expensive because it would mean that the attackers are giving up, say, 1437 bitcoins per day. It’s unlikely that an attacker can let their opportunity cost and profitability to suffer to that extent.
As you can see, mining centralization is not an attractive bit when it comes to bitcoin networks and mining. Well, the moral obligation lies entirely on the miners to be responsible for the selection of transactions to take it out of the centralized pool industry.