Big miners pose a growing existential threat to Bitcoin

    17 May 2024

    Bitcoin mining is now in the hands of the few. Well-known mining pools have seized overwhelming power, which poses an existential threat to the world’s first digital asset. It’s the logical outcome of a design flaw by Satoshi Nakamoto.

    Unfortunately, Bitcoin mining has always tended towards centralization. Bitcoin miners could once mine blocks with CPUs on personal computers due to fewer miners and therefore a lower overall hash rate. That evolved into GPUs around 2010 and into application-specific integrated circuit (ASIC) miners in 2012. ASICs ultimately gave rise to massive mining companies that filled warehouses with hundreds or thousands of rigs.

    Miners who control a greater percentage of Bitcoin’s network hash rate are more likely to mine blocks and collect the Bitcoin block reward — the financial incentive for verifying and adding transactions to the Bitcoin blockchain. That’s why small-scale miners often join a mining pool along with others running their own ASICs. These miners earn in proportion to the amount of computing power they contribute to a mining pool’s network.

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

    Mining pools constitute a centralizing influence on the Bitcoin network. Big mining pools benefit from economies of scale. Generally, larger pools have more efficient operations. More troublingly, a mining pool that controls more than 50% of the Bitcoin network hash rate could initiate a 51% attack against the network

    Nonetheless, mining pools have come to dominate the Bitcoin mining industry. Small and medium sized miners lend their power to a pool to minimize costs and maximize revenue. Over the years, Bitcoin mining pools have become more centralized and prone to censorship. For instance, the top two mining pools, AntPool and Foundry USA, require miners to go through Know Your Customer protocols.

    These two pools controlled nearly 50% of the network’s hashing power in February, but had grown their share to 56.4% as of May. That gives them much greater ability to censor transactions — by refusing to confirm them — in blocks that they mine.

    F2Pool has already censored transactions

    Miners have already censored transactions — from Bitcoin addresses sanctioned by the Office of Foreign Assets Control (OFAC), a financial intelligence and enforcement agency under the U.S. Treasury.

    The prime example took place in September and October 2023, when Bitcoin developer 0xB10C’s personal project, miningpool-observer, detected that mining pool F2Pool failed to validate six transactions from OFAC-sanctioned addresses. He found that four of the transactions were likely intentionally filtered, making F2Pool the first pool to adhere to OFAC sanctions.

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

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

    Can we trust Wang and other miners to not abuse their power to censor other users? No. Bitcoin exists so you don’t have to trust. Moreover, there is little need for such measures, because they simply aren’t effective. Bad actors can simply spin up new Bitcoin addresses whenever needed. Worse, they could switch to the theoretically more private Monero, making it more difficult for regular law enforcement agencies to monitor them. (And in this particular case, the transactions were ultimately confirmed by other miners.)

    0xB10C also claimed mining pools are even more centralized than people think with AntPool controlling nearly 50% of all Bitcoin hash power. Bitcoin developer Matt Corallo acknowledged his colleague’s findings, writing on X that miner centralization does have an effect on Bitcoin and “arguably destroys the long-term value proposition of bitcoin itself.”

    If a single group controls 51% percent of bitcoin’s mining power, they can censor transactions and double-spend, which occurs when the same bitcoin is spent more than once. The US government or Chinese government could exert pressure on these large mining companies to exclude transactions from Bitcoin blocks.

    As if so much centralization in the mining complex itself wasn’t enough, BlackRock has its tentacles all over the Bitcoin mining after investing in many of the top miners, including Marathon Digital, Cipher Mining, and Terawulf Inc. Wall Street could conceivably wield influence over the Bitcoin mining index in a manner similar to the way that the “Big Three” — BlackRock, State Street, Vanguard — wield influence over the stock market.

    Bitcoiners should start fighting back

    Mining pool consolidation is a concerning trend. However, Bitcoin has too much value for everyone involved to fail. Node operators, small blockers and “plebs” will prove too strong for any centralizing force to control.

    The Bitcoin community can combat such consolidation by running as many independent nodes as possible. Nodes can choose any unadulterated chain in the event a Bitcoin mining pool launched a 51% attack against Bitcoin. ASIC owners help to stop a mining pool from attacking Bitcoin by pointing their mining rigs to a different mining pool. If you’re running an ASIC machine, refrain from pointing it to the largest pools — such as AntPool or Foundry USA — which require you to cough up personal information anyway. Every mining pool could lose business this way, which would go a long way toward dissuading malicious behavior.


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