Bitcoin’s Weak Spot: Mining Centralization and How We're Working on It

One of the biggest threats to the Bitcoin experiment is mining centralization. Gone are the days in which China controlled 60% of hash power, and a single mining pool could get close to the dangerous 50% range. However, there are still centralizing forces at work. From the ASICs market to the mining pools to the big miners edging out the small ones, centralization comes from all angles. Will the Bitcoin network resist and react to the pressure that this generates? History says it probably will.

Two companies, both Chinese, control the ASIC market with an iron fist. Plus, all of its current competitors are in China as well. That’s not healthy for the bitcoin network. It’s one of those single points of failure, in fact. On their consumer’s end, the industrialization of Bitcoin mining brings firmness, strength, and other positive aspects to the network. It also discourages home mining since the competition is so vast and well-capitalized.

Not only that, those giant publicly traded miners are signing deals with energy companies that give them even more of an edge. Those powerful interest groups connecting through Bitcoin speak volumes about the network’s future. It also contributes to the mining centralization problem. Small miners are crucial, but how can they face these six-headed hydras?

Add this log to the fire: BlackRock is heavily invested in Riot, Marathon, Cipher, and Terawulf. The asset management firm has a large ownership stake in all of those businesses, which are 4 out of the five biggest publicly traded bitcoin mining companies. That’s centralization on top of centralization.

Lastly, the mining pool problem persists. Even though the ecosystem is more decentralized than ever, there are still miles and miles of room for improvement. Every miner can direct its hash rate wherever it wants. Most choose to join a mining pool, and those entities get to pick and choose which transactions go into the blocks that they validate. That’s right; a few mining pools create the vast majority of Bitcoin’s blocks. That’s mining centralization in another flavor.

The good news is that the Bitcoin network is working on it and will probably solve every issue. Keep reading to learn how.

The Two Giants: Bitmain And MicroBT

The Bitmain story is a modern-day myth. In 2013, Jihan Wu and Micree Zhan joined forces to create ASICs, and in a few years, their company took over the mining industry. Between 2015 and 2017, however, they backed the wrong horse in The Blocksize War and ended up with a damaged reputation and significant funds in the rapidly declining Bitcoin Cash (BCH.) In 2016, their star chip designer, Yang Zuoxing, walked out after negotiations for equity in the company fell through. In 2019, Wu and his partner had a falling out and a very public fight that involved Zhan taking buildings over using private security. In the end, Wu prevailed and outsed Zhan.

Despite Bitmain’s disastrously hilarious history, the company still dominates the Bitcoin mining hardware market even if it has lost a lot of terrain to a younger competitor.

According to a report from that time, the first incident that got Yang Zuoxing to quit his job was this one: “Yang said he decided to move from Bitmain's Beijing office back to Shanghai after just two weeks because he didn't fit in with Bitmain's "working environment," adding he "didn't feel respected." To add insult to injury, during the mentioned negotiations, Wu offered him “2 percent of Bitmain's equity. Zhan did not go along with that plan and made an alternative offer of 0.5 percent.”

After that, in 2016, Yang Zuoxing raised 20 million dollars to create MicroBT and the Whatsminer series. Slowly but surely, he made Bitmain pay for its indiscretion. At the time of writing, MicroBT has secured 40% of the bitcoin mining ASICs market and has a new generation of hydro and immersion-cooled machines ready to hit the stores.

Whatever happens, the current reality is that Bitmain and MicroBT control over 90% of the ASICs business. To illustrate why mining centralization on the manufacturer’s side could be a problem, let’s quotethis Block report on their ASICs program:

“Developing bitcoin mining ASICs is a very challenging endeavor, both technically and in terms of the investment required. Prioritizing a bitcoin mining ASIC development program requires technical expertise, capital availability, and a long term commitment. Thus, the barriers to entry for bitcoin mining ASIC development are high. This has led to a high level of centralization of the supply of bitcoin mining ASICs, to the detriment of bitcoin miners and the bitcoin network’s resiliency.”

That specific Block program might be one of the answers to the problem.

What Is Jack Dorsey’s Company Doing To Fight Mining Centralization?

In April this year, Intel discontinued its ASIC chips program. “As we prioritize our investments in IDM 2.0, we have end-of-life’d the Intel Blockscale 1000 Series ASIC while we continue to support our Blockscale customers.” The move baffled the Bitcoin community because mining giants like Argo, GRIID, and even Block had already signed to get a steady supply of Made in America chips. Who at Intel decided to fold so early in the game?

The big winner in this scenario was Block. In the already quoted report, they say:

“We learned of an opportunity to acquire a large volume of bitcoin mining ASICs from Intel, and just completed a purchase agreement with Intel. This immediate access to production ASICs accelerates our mining system development, enabling us to get to market more quickly.”

How quickly, though? That remains to be seen. Block might be the company to do it, however, as it has “longstanding ASIC design experience, having made ASICs for our Square point of sale solutions for years.” Block wants to fight mining centralization, as its “motivation for this initiative is to increase the decentralization, transparency, and resiliency of the Bitcoin network.” Plus, the company plans “to make our bitcoin mining technology open source where we can.” Which is a lot.

In that regard, ina report on the “Mining Development Kit,” the company claims:

“This initial version of the MDK is primarily intended as a toolset for use by technically proficient developers. Over time, we may introduce products for wider audiences, depending on interest from the market. It is also our intention to make the hashboard and controller board available for sale on a standalone, a-la-carte basis, to support development of applications requiring multiple hashboards, and easy sourcing of replacement parts.”

So, the much-needed program is well on its way, even if Block admits it’s “still in the early stages.”

Riot And MicroBT Produce Chips, Conquer America

While Intel promised Made In America chips to three of its competitors and only delivered a batch, the mining giant Riot had plans of its own. Two months ago, they announced a partnership with MicroBT to open an ASIC manufacturing plant in Pennsylvania. Immediately after, Riot told the world how invested in the partnership it is:

“Under the Agreement, Riot has secured an initial order of 33,280 next-generation Bitcoin miners from MicroBT. The miners will be produced by MicroBT in the United States for Riot’s Corsicana Facility, for total consideration of $162.9 million (exclusive of applicable taxes and fees and adjustments), equating to approximately $21.50 per terahash (TH).”

Can we assure the public that ASIC manufacturing will now occur in two countries, China and the U.S.? Not yet, but we’re almost there. And that could open the door for the whole world to join the party.

BitaxeUltra, A Mining Solution For Small Operations

This project and others like it could be key to solving the mining centralization problem. How can small miners compete? If this project succeeds, it could be the answer to that question. “The bitaxeUltra is an open source Bitcoin ASIC miner project based on the BM1366 ASIC used in the Antminer S19XP.” Its main characteristic is that the chip it uses costs about $15 on Alibaba.

This beauty is still a prototype, but if successful, its GitHub promises it will be a standalone ASIC miner. That means it “can mine directly to your pool over WiFi. No External computer needed.” The bitaxeUltra will be “low cost, low maintenance, high availability, high reliability, low power.” This baby could further democratize Bitcoin mining and give small miners an edge. Plus, the idea is already out there. If it doesn’t work, another smart kid will figure out how to cheaply produce an open-source ASIC miner.

The Bitcoin network is aware of its problems, and Bitcoiners worldwide are working full-time to solve them.

Does Stratum V2 Solve The Mining Centralization Problem?

Some Bitcoiners might deny it, but a few mining pools control most of the hash rate. Sure, individual miners can easily point their machines to a different mining pool if the one they’re using is getting close to the dangerous 50% range. That doesn’t eliminate mining centralization. Especially considering that those mining pools construct each and every block for the miners. The pools pick and choose which transactions get through. That’s undeniable mining centralization right there. And it could lead to censoring; there are no two ways about it.

Enter StratumV2, a new protocol to help mining pools evolve. “It increases security, makes data transfers more efficient, and reduces mining infrastructure requirements. It also introduces three new sub-protocols that let miners select transaction sets.” That’s right, once V2 goes into effect, individual miners will select which Bitcoin transactions go through. With one stroke, the new software will effectively defeat mining centralization and make “the network more censorship-resistant” as it “introduces by-default encryption and NOISE protocol authentication, hardening the protocol against man-in-the-middle attacks.”

Centralizing forces abound, but the Bitcoin network shows its resilience every time. Of course, there are still miles and miles of room for improvement, and the hash rate is still unevenly distributed geographically speaking. We’re working on it, though.

This was a dispatch by Eduardo Prospero, Bitcoin’s ambassador to Hackernoon.

In case you missed them, these are the previous dispatches → 1 - “Why BITCOIN ONLY? - Bitcoin is NOT “Crypto” 2 -  “Bitcoin Is The ONLY Digital Scarcity That Matters — Here's Why”

Open-source images by Yegorpetrov.

Also published here.