When building Bitcoin, Satoshi Nakamoto envisioned a decentralized digital currency that could operate without the need for centralized institutions such as banks and governments.

Satoshi did not picture a situation where a few entities controlled a significant portion of the entire network, essentially centralizing power and influence.

Bitcoin mining centralization, a result of market competition over the years, goes against the fundamental principle of cryptocurrency.

Bitcoin mining centralization is the concentration of mining power among a few dominant players. Originally, anyone with a computer and internet connection could mine Bitcoin. However, the network grew with time, and as a result, mining became more competitive.

This led to the development of specialized chips known as ASICs (Application Specific Integrated Circuits), which outperformed GPUs and CPUs by being more efficient. Unfortunately, ASICs are expensive and out of reach for most people, and the fact that newer, better, but more costly versions are released exacerbates the situation.

Miners began to form pools to combine their computing power and share the rewards earned. The largest pools also acquire the latest technologies to stay ahead of the competition, which caused others who couldn't keep up to drop off.

Over time, a few large mining pools, including Foundry USA, Antpool, and F2Pool, have come to dominate the Bitcoin mining industry, controlling a significant percentage of the total hash rate at any given time. This beats the logic of cryptocurrency, which is supposed to distribute power among many players.

Several factors contribute to the centralization of Bitcoin mining. Most of these factors also apply in a typical competitive market. They include

While Bitcoin mining centralization is a natural process inspired by competition, it presents a few challenges to the network and ecosystem.

All these challenges require careful consideration and action if the integrity and security of the Bitcoin ecosystem are to be preserved. But how?

Over time, various parties have suggested ways to solve the centralization issue.

Bitcoin Core developer Matt Corrallo proposed the BetterHash Protocol, which involves decentralizing the selection of transactions going into a block to individual hardware operators. However, it didn't provide a mechanism that would ensure miners will choose transactions that create a balanced difficulty for the Bitcoin network hence opening another loophole for centralization. It also introduced inefficiencies due to the need to constantly monitor the network, which was hard to adopt.

Meanwhile, the crypto mining pool P2Pool suggested decentralizing payouts to address the issue. However, by decentralizing payouts, small miners who rely on consistent payouts to cover costs would be disadvantaged. Also, it required low-latency connections between miners and the P2Pool server, which meant whenever a miner experienced high latency, their mining performance would be negatively impacted. For these reasons, it didn't incentivize its adoption.

The most direct way to solve Bitcoin mining centralization is to decentralize the mining pools. This can be achieved through incentives that encourage the use of smaller and more decentralized mining pools. A practical incentive would be to fund innovation and experimentation by small miners, leading to better and more competitive mining strategies.

Notably, former Twitter CEO Jack Dorsey's payment company, Block, started working on an open Bitcoin mining system to make the network more decentralized and permissionless. Block aimed to build its own high-performance open-source ASIC and a Bitcoin wallet to make Bitcoin custody more mainstream.

Nevertheless, incentives alone may not be enough to encourage decentralization. Regulatory policies, network upgrades, and community initiatives may also be necessary to encourage the growth of smaller and more decentralized mining pools.

It's difficult to predict that Bitcoin mining will become more decentralized. Mining power will remain centralized among dominant players as mining becomes more expensive.

Due to economies of scale and other bottlenecks, smaller miners continue to struggle against the big dogs. As a result, it would take tremendous efforts by the rest of the Bitcoin network to implement strategies and solutions to solve Bitcoin mining centralization.

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What Is Bitcoin Mining Centralization and Why Is It a Concern? - MUO - MakeUseOf