Hashrate concentration on mining pools has become a major centralization risk factor for Bitcoin
Bitcoin is the hardest, most secure form of money humanity has ever created, and most of that is thanks to proof-of-work.
Mining ensures security and high performance for Bitcoin while rewarding those who provide it. In turn, mining pools allow retail and domestic miners to participate in the process and turn a profit from it. However, it’s not a perfect system.
Over the last few years, the rise of Bitcoin in terms of both value and adoption has impacted on the mining landscape.
Megasites have sprouted across the globe — mainly in North America — and hashrate has skyrocketed, bringing difficulty with it. This situation is less than ideal, as it makes domestic mining virtually non-viable unless connected to a mining pool.
Nevertheless, this carries with it another issue.
The current mining pool model needs improving
Bitcoin mining pools were a consequence of the transformation of the mining industry. Indeed, after GPU mining was displaced by ASICs, small miners had no choice but to connect to pools to stay profitable.
Mining pools allow miners to combine their hashpower, thus increasing their chances of finding a block. Pool operators handle the day-to-day operations and distribute rewards according to each miner’s contribution, charging them a fee in exchange.
It’s important to note that by contributing their hashrate to a mining pool, miners are also granting pool operators the decision-making power that comes with it.
In other words, it’s the pool operators that create the blocks and select what transactions to confirm; not the miners. This is where the risk factor kicks in.
Why? Currently, only a handful of mining pools concentrate the majority of Bitcoin’s total hashrate. To be more precise, the top 3 pools manage ~51% of the total hashrate. The number climbs to ~96% when looking at the top 10.
This means that only a small group of people could collude and coordinate an attack on Bitcoin. More importantly, even if pool operators are honest, they could be pressured by central authorities that force them to exclude or censor certain transactions.
Fighting centralization at the mining pool level
The centralization risk is evident. Even if pool operators act in good faith, hashrate being concentrated in less than a dozen of pools is still a vulnerability for Bitcoin in the face of external pressures and central authorities.
Although the Bitcoin community is already working on possible fixes — like pools allowing miners to create their own blocks — the most effective solution is clear: Bitcoin needs more mining pools.
Distributing hashrate among several pools would scale down the risks associated with hashrate concentration. In turn, it would also enable multiple decision makers, reinforcing decentralization.
Nevertheless, this is not so easy to achieve. The more hashrate on a pool, the bigger the chances of finding a block and getting paid. As a result, it’s cumbersome for new pools with no hashrate to become attractive for miners to join them. They’d probably have to wait a long time before finding a block.
So, a new question arises. How can we add new Bitcoin mining pools while simultaneously incentivizing miners to join them?
What if large-scale miners ran their own mining pools?
According to the Bitcoin Mining Council, 44 miners produce around ~50% of Bitcoin’s total hashrate. These enterprise-level mining organizations often work out private deals with pool operators, who offer them better terms to secure their hashrate.
These 44 miners could run their own mining pools instead of them all joining just two or three. They would produce the same amount of hashrate and earn virtually the same amount of rewards. They would find fewer blocks, but keep 100% of the reward.
However, Bitcoin’s decision-making power would be much more decentralized. Each miner would create hteir own blocks and choosing which transactions to confirm.
In short, under this model, “public” pools would provide support and services to domestic and small miners with less hashrate. On the other hand, large mining megasites would run their own mining pools —let’s call them “private” pools— which would grant them more control and predictability over their operations.
This possible scenario for Bitcoin mining represents an almost ideal situation. Not only does it serve the network well by improving its security and decentralization, but both small and large miners can benefit from it. Only large mining pools would be negatively affected, although not to the point of becoming unsustainable.
What are the limitations?
You might be wondering why, if it’s more advantageous for everybody, institutional miners aren’t running their own pools.
Setting up and maintaining a mining pool requires tremendous time and effort, as well as dedicated infrastructure and equipment.
That said, it’s cumbersome to do that when you’re overseeing a facility with dozens of thousands of ASIC miners. Indeed, the larger a miner’s operation is, the more sense it makes to throw off those responsibilities by paying a fee to pool operators.
As we mentioned, it’s important for the Bitcoin network that these miners run their own pools. Not only to enhance their profitability and stability, but also to further decentralize the network.
At Titan, we want to enable miners to do that. Running a mining pool must be easier if we want a fully decentralized and secure Bitcoin network.
To that end, we’ve set up a white-label, privately hosted Bitcoin mining pool service. “Private” mining pools, optimized for enterprise-level miners committed to decentralization who want to start mining against their own pool. All for a low, flat monthly rate.