The computer network underlying Bitcoin is the largest and most sophisticated computerized system in the world with work units in almost every part of the globe, from China and Kazakhstan to Venezuela and the United States.
And with recent all-time highs in hash rate and difficulty level, the Bitcoin mining industry is more competitive than ever. Meanwhile, there are questions about whether decentralization efforts are enough to combat China’s dominance in the sector.
An important part of the overall growth of bitcoin mining as well as its decentralization is the network of mining pools that bring miners together to pool their resources to more strategically fight against the global subsidies of an ever-increasing system. more competitive.
The role of mining pools
Bitcoin mining is becoming more and more competitive, with higher difficulty rates than ever, producing higher than ever hash rates.
But even with the best equipment available, today’s miners need a sophisticated strategy to succeed. as well as a bit of old-fashioned luck, according to Ryan Porter, business development manager for BitOoda.
“There’s the concept of ‘luck’ that you have to consider in mining,” Porter said. Bitcoin Magazine. “If you contribute 1% hash rate to the network, you will generate 1% of the blocks over time, but in the short term your rewards can be very inconsistent depending on your luck. For example, a week you can earn 5% of the blocks, then you can’t earn any more blocks for two weeks.
And this inherent bliss is what motivates many miners to pool their hashing power.
“The key role of a mining pool is to smooth the revenue stream for miners,” Porter added. “Many mining pools will take the risk of ‘luck’ and pay miners based on the expected bitcoin output of their hashing power, in return for a royalty on the block of rewards the pool earns.”
John Lee Quigley, head of research for mining media company Bitcoin HASHR8which is dedicated to the decentralization and security of Bitcoin, sees things getting more complicated for miners – which could also be driving the growth of mining pools.
“Many large-scale miners operate just above the margin and they cannot afford to take on the variance of finding blocks on their own,” he said. “They have expenses to meet and they need a regular payment. Mining pools assume the variance for themselves. They play a vital role in the industry.
Not only do mining pools provide equipment and advice, but they are better able to implement a sophisticated mining strategy using algorithms such as profit shifting to maximize every profit angle.
To learn more about mining pools, visit Bitcoin Magazineguide.
Most mining pools are in China
With the notable exception of the very first swimming pool created, SlushPool (headquartered in Prague), all major mining pools are based in China, reflecting the current global hash rate concentration (with between 50-65% of the global hash rate concentrated in the country, depending on the source ).
Hash rate per mining pool
Large-scale mining operations have grown faster in China than in other parts of the world, and pools have played a major role in this development. In a recent interview, Porter noted that 55% of Bitcoin’s global hash rate comes from just four major mining pools in China: F2Pool, Poolin, BTC.com, and AntPool.
But as mining becomes more and more competitive with new iterations on technology and increasing difficulty rates, even miners in China, who mine some of the cheapest electricity rates in the world, are still seeking l using pools.
Individual miners join pools because they can operate with sophisticated strategies such as profit transfer algorithms, get information and help from pool operators, and find ways to secure equipment.
Can North America catch up?
In our conversation about the concentration of mining pools in China, Quigley highlighted how North America – the second largest region for Bitcoin mining – really competes with the epicenter.
“North America is catching up, but it hasn’t left the starting blocks when it comes to mining pools,” Quigley said. “It will be difficult for North American pools to compete. We’ll likely see more emerge over the next few years, but their fate is debatable. The mining pool business model already has extremely low margins, and North American companies will face far greater overhead than their Chinese counterparts.
In addition to this overhead difference, Quigley noted that China-based pools already have an almost insurmountable advantage in their relationship with industrial mining hardware operations.
“Additionally, most miners are based in China and many transactions are done face-to-face,” he explained. “In major centers like Beijing, there will be many secret meetings that only those in the mining industry will attend. The hash rate that is traded in these meetings is virtually exclusive to Chinese companies and it will be nearly impossible for the pools North Americans to compete for the majority of it.
Governments are getting involved, some with their own mining pools
When it comes to mining pools, 2020 was the year governments joined the club.
Venezuela created its own national mining pool. Iran introduced a new mining strategy and licensed mining farms, which are now under government regulation. from Kazakhstan The government is investing and promoting bitcoin mining to help diversify its oil and gas sector.
But are these new players making a difference in the decentralization of mining?
HASHR8’s Quigley weighed in on these surprising developments in bitcoin mining.
“It is difficult to assess how different governments will react as the Bitcoin mining industry continues to grow,” he explained. “Different governments will respond in different ways. From Venezuela, we recently watched authorities seize platforms from citizens. Now they demand that all miners register with the government and use a national mining pool. Iran has adopted a friendlier approach and encouraged investment in mining infrastructure. They authorized some mining operations and also provided electricity subsidies in some cases.
And chances are, these three examples are just the beginning of more governments officially entering the bitcoin mining space by pooling the hash rate. But that may not be good for Bitcoin’s decentralization or security.
“The mining sector will always have a precarious relationship with government,” Quigley said. “Governments that become closely involved in the mining industry will certainly raise red flags among those aligned with Bitcoin ideology. In the event that all hash rates are directed to government-owned mining pools, they would have the ability to censor certain transactions, which is similar to our current financial system.
Decentralization of bitcoin pools, institutions and mining
With the current landscape of bitcoin mining pools assessed – including industry concentration in China and concerns over government-sponsored pools – it’s worth asking how one of Bitcoin’s critical goals is affected. Specifically, is the current trajectory of mining pools making Bitcoin more centralized?
According to a recent Coinmetry report, the mining industry is becoming somewhat more decentralized overall as new regions of the world open up to mining, although China’s role also continues to grow.
Samson Mow, CSO for Blockstream Mining, is optimistic about the future of mining decentralization and predicts steady growth of mining pools in North America. He envisions increasing decentralization through mining pools and noted that while there may still be a risk of a centralized power grab, it is not likely.
“Pool mining is always a potential risk as an attack vector, but luckily it’s relatively easy for miners to switch pools, so this only poses a short-term threat,” a- he declared. Bitcoin Magazine.
For his part, Porter sees some decentralization coming with increasing institutionalization.
As new companies, including exchanges, offer mining services to their clients, they will either work with a pool or create their own. Porter cited the examples of Binance, Huobi, and OKEx, which in addition to exchange services now operate mining pools so that miners can collect their block rewards and trade seamlessly in the same transaction.
“I think you’ll see the same thing develop in other markets as the hash rate continues to grow outside of Asia,” Porter said.
While hash rate expansion outside of China would go a long way to decentralizing Bitcoin mining, it won’t necessarily happen through mining pools. More and more institutional mining operations are springing up in North America, for example, raising questions about whether hash rate decentralization will happen through these operations or these mining pools.
The ability of institutions outside of China to secure and operate mining equipment is key to decentralized growth, according to Mow.
“Things are much better now that we have multiple ASIC manufacturers, hosting providers like Blockstream, and the hash rate being spread more evenly across pools,” he said.
But, when asked if he thinks institutions like Core Scientific could replace mining pools in North America, Poolin vice president Alejandro De La Torre hesitated.
“No, Core Scientific will need to connect to a pool to have the best chance of finding blocks,” he said. “There’s no way they can compete with us, for example, when Poolin has around 16% (over the last year) of the hash rate.”