Misconception: Centralization of miners will not disrupt Bitcoin

A recent report by TokenAnalystclaims that after five major mining pools jointly launched a new cloud mining service, it is equivalent to having a single entity that can control about 50% of Bitcoin network's hash rate.

Since 2008, Bitcoin has become a highly centralized network system, increasingly reliant on a few large entities. Cryptocurrency research firm TokenAnalyst states that we should be concerned about the centralization of Bitcoin network's hash rate as it undermines the network's trustless model. The company argues that "Bitcoin (BTC) relies on the decentralization of hash power to ensure system security," but is this really true?

CoinDesk columnist Hasu has shared his personal views on this issue in the following analytical report.

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Centralization of Mining Power is Inevitable

Undoubtedly, miners with 100% of the total network's hash rate have greater control over the network than those with 10%. Miners with a higher percentage of hash rate can easily conduct double-spending attacks, prevent transactions they disagree with from being confirmed on the blockchain, and manipulate the blockchain to their advantage.

If the majority of miners may act maliciously and harm users, does this mean users should make every effort to prevent the centralization of mining power?

Former Bitcoin Core developer Greg Maxwell believes this is futile, as attacking the blockchain does not depend on how much hash rate an individual or entity controls. If there are 100 miners in the system, each with an equal amount of hash rate, an attack can still be successful if the majority colludes.

This perspective is crucial as it indicates that we can never completely eliminate centralization. Miners can always collude and consolidate in the shadows, trusting a system that can easily collapse after a single conference call is absurd. If miners can make more money by colluding, we should assume they will do so.

According to Maxwell, this issue may be unsolvable because "any mechanism that can prevent one party from having too much hash power can almost completely replace the entire mining mechanism."

Since we cannot avoid the problem of power centralization in Proof of Work (PoW) or Proof of Stake (PoS), should we not be concerned about it?

Centralization of Mining Power is Harmless to the System

Yes, we do not need to worry about this issue. Bitcoin's original design did not assume an evenly distributed mining power, as it was not necessary. Instead, it assumed miners are "rational," which is entirely different. "Rational" means miners will make decisions that best serve their interests, even if it involves colluding with other miners to attack the system.

Satoshi Nakamoto directly addressed this issue in the whitepaper:

"The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation-free."

The incentive mechanism in the form of mining rewards and transaction fees motivates most miners to choose honesty. Nakamoto realized that the only way to deter greedy attackers is to make following the rules more profitable than breaking them. This is the key to ensuring Bitcoin's security, yet it is one of the most widely misunderstood aspects of Bitcoin's design.

Economist Paul Sztorc even stated:

"Assume the entire network's hash power is owned and operated by one person, 'Greedy Mr.' Why doesn't Greedy Mr. conduct double-spending attacks? (He can reorganize the blockchain at will.) Because Greedy Mr. would rather earn all the mining rewards than to destroy the system (and the effectiveness of his own wealth)."

I must admit, I was not satisfied with the initial Bitcoin security model I had in mind. If Bitcoin miners are vulnerable when colluding and controlling under 51% of the hash power, how could we monitor (let alone prevent)? Furthermore, considering that several individual mining pools in BTC control more hash power than the entire network, why do forked coins like BCH and BSV not constantly face attacks?

When I realized that centralization of mining power is not actually significant, these questions disappeared. Bitcoin is secure not because it is decentralized and difficult to attack, but because the cost of attacking it is high.

Actual Cost of Attacks

The cost of an attack is directly related to how much hash power the attacker possesses. This was a key finding in a paper I published in 2019 with Curtis and Prestwich here. In a simplified model, we estimated the present value of all Bitcoin mining operations to be around 658,800 BTC or approximately $6 billion at the current Bitcoin price. (Thus, the value (output) of 60% of the hash power is approximately 395,000 BTC or $3.6 billion, and so forth.)

The present value of these miners depends on the network's value as their future profits come entirely from block rewards. They earn in the form of Bitcoin. If Bitcoin faces significant issues and users lose confidence in the system, this 658,800 BTC value will be heavily discounted, resulting in significant opportunity costs for the miners.

Assuming an attacker with 60% of the hash power decides to attack the network, causing a 10% drop in Bitcoin's price (a fairly conservative assumption), they would lose $360 million in future profits, which is the opportunity cost of their attack.

This figure helps us understand how much profit an attacker would need to gain through an attack to break even. Moreover, this does not include the possibility of the other 40% of miners backtracking and forking the blockchain, rendering the attacker unable to gain any profit.

Savolainen and Soria reiterated the same view in their recent paper "Too Big to Cheat: Mining Pools' Incentives to Double Spend in Blockchains". The authors concluded:

"Historically observed mining pool centralization does not imply a higher risk of blockchains being double-spent. This result confirms the well-known economic insight that feasibility does not imply desirability."

Conclusion

Mining centralization is inevitable. Since attacks on Bitcoin result in opportunity costs increasing proportionally with the attacker's controlled hash power, the concentration of mining is essentially harmless as attackers with significant hash power will incur significant losses due to their attacks.

Further Reading

• Mining Difficulty Approaching? Bitcoin Production Cost to Exceed Ten Thousand Dollars After Halving
• Unknown Mining Pool Hash Rate Approaching 50%, Threatening Bitcoin Cash

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