Bitcoin Mining Centralization: Detrimental Effects, Serious Threat or None of The Above?
For all of the negative connotations that we attach to cryptocurrencies like Bitcoin, it's ushered in the innovation of decentralization that makes concepts like Web 3.0 all the more likely to be realized in our generation.
With aspects like Proof of concept among others commonly applied by Decentralized Apps (dApps), it's allowed for the creation of hundreds of DApps and thousands of startups that are tirelessly acting to pull power away from what many believe to be an overly powerful centralized system.
But while Bitcoin at its very core and White Paper, espouses crypto-anarchism, thanks to mining companies like Bitmain, it remains a decentralized concept under a very centralized system of extraction. So how centralized is Bitcoin thanks to the use of Bitmains ASIC chips? And how centralized are the infrastructures that exist behind this decentralized web?
What do we mean by ‘Centralized' and ‘Decentralized'?
In order to effectively understand the question and subsequent answer, it's important to first understand what we mean when we say ‘Centralized' and ‘Decentralized'.
The concept of breaking up a system that controls a major volume of functions. Effectively, this is the process of pulling power away from a central system and dispersing it.
While this sounds like an anarchistic concept, when the internet was first established in the 1970s, it began as a series of computers operating in a completely decentralized fashion. Once it became popular, the process of centralization was underway, creating the internet we have now, and the one blockchain promises to disrupt.
Cryptocurrencies like Bitcoin shattered the concept that centralization was just the way things had to be. Before Bitcoin, any transactions and movement of data had to go through a 3rd party which served to connect one party with another, much like how a bank acts as an intermediary between the payer and payee.
Thanks to Cryptocurrency, the 3rd party can be eliminated wholesale, leaving the proverbial buyer and seller to complete an action on their own, with no intrusion. Is this a big deal? Consider this: every and all transaction you make with your credit or debit card are tracked and subject to a third party allowing you to make that purchase or accept money.
With Cryptocurrencies? The information is there for anyone to see, but it provides the respective parties with a far higher level of anonymity. Any and all information about who owns what is stored on a blockchain, this is called a ‘Distributed Ledger'.
This information that's stored on a blockchain is then validated by a countless number of computers that do so for a reward.
So what is Web 3.0?
Decentralization, thanks to Satoshi Nakamoto, is becoming the one thing motivating change in the world of blockchain among many others. Startups are looking for ways in which it can disrupt, and one recurring area is the internet.
One overlooked way in which Decentralization is making it possible for a new era of startups is through the Initial Coin Offering (ICO), a system that intimidates the established system of funding such as Venture Capital funds and Initial Price Offerings (IPO's).
It's thanks to this new, decentralized system of fundraising that we're seeing the first generation of computer applications that decentralized systems we thought were eternally central. These include systems like Storj (a decentralized Cloud storage company) or text editor systems like Graphite, which pulls power away from systems like Google Docs.
The Cryptocurrency world is waking people up to the reality of the internet: that it began as a decentralized system of peer-to-peer transactions, and that the system we live in right now is an intrusive, untrustworthy one with self-interested companies that have proven over this year, that they are not worthy of the trust given to them.
Companies like Alphabet, the corporation behind Google, and others like Facebook and Amazon are some of the companies that hold a monopoly over users information. But it's exactly that: a monopoly, and it's one that decentralization, thanks to Bitcoin, is striving to free people from.
Web 3.0 sounds idyllic, but how decentralized are the computers that help make it possible?
Bitcoin, as previously mentioned, may be suffering from the fate of irony, which is that while it espouses a decentralized, crypto-anarchic system, itself has become a victim of centralization.
Initially, Bitcoin mining began, just as anything does, with humble origins, being mined thanks to the tireless extractive efforts of people operating on their laptops and PCs. But as mining progresses, the hashing algorithm required to successfully extract it gets tougher, and as that gets tougher, the sophistication of the hardware increases.
This means that only those that can afford to upgrade and keep up with the hashing demands will have the ability to extract Bitcoin. Inevitably, this means that companies like Bitmain take the initiative and come to control the market due to their superior resources.
Bitmain is the designer of the ASIC (Application-Specific Integrated Circuit) Chip, which has become a staple in the world of cryptocurrency mining. How much of an effect did this have on the market? During March of 2018, Ethereum prices among others dropped with the news that Bitmain was developing a new ASIC chip which could deliver a far superior hashrate when compared to conventional graphics cards.
This chip is now being used to mine Ethereum, leading to further concerns that Ethereum would be the next crypto to fall into the pitfall of centralization.
Other companies have entered the fray regarding cryptocurrency mining programs and chips, reinforcing the reality that, while espousing decentralization, cryptos are rapidly becoming the latest models of centralization.
While it seems like the centralization of mining is a straightforward scenario of moving from an embryonic system of independent miners to where it is now, the reality is far more complex.
The concept of mining centralization can be split into three separate components:
This consists of the mining and manufacture of hardware needed for mining cryptocurrencies, which has since fallen into the hands of monopolistic companies, but rather than specifically operate it themselves, sell them on to individual miners worldwide.
The operators of the mining hardware that Bitmain produce. In this bracket, the majority of the hash rate produced is conducted by a series of corporations either directly or indirectly using a series of independent miners. Overall, 19 big groups including Bitmain make up the majority of hash rate in mining.
Pool mining brings up the final category which all comes down to geography, with some of the biggest being localiszed in specific countries. The single largest for now is China, which in spite of having a hard-line approach towards cryptocurrencies, takes up the majority of operations.
As China's crackdown becomes more intense, this geographic monopoly will be interspersed across more crypto friendly countries such as Iceland, Malta and the US.
The problems with Centralized Mining
What this demonstrates is that while decentralization promises a dramatic changing of the order for institutions like the internet, it's fast become a victim of the one thing it's attempting to destroy.
One of the dangers is that, should a company gain a monopoly over mining, such as Bitmain, they would be able to interdict whether or not individual miners can continue to mine; and may even go so far as to introduce backdoor systems of kill-switches in order to preserve their position from challengers.
Bitmain is also facing scrutiny for manipulating prices for its mining equipment through supply, which hurts decentralization in terms of who operates the equipment.
Decentralization is a paramount need, on all fronts. The risks of having all mining activities concentrated in one area of the world or one company mean that the entire system could be subject to unscrupulous activity and even widespread shutdown.
Given the fact that difficulty adjustment in mining takes roughly two weeks, it means that Bitcoin would be too slow to react and prevent wider spread panic from taking over the market, which could subsequently flood the mempool with transactions from those looking to get out.
While Nakamoto sought to battle against centralization with his ideas, the first and next generations of decentralization are put at risk by the dragon it seeks to smite.