What the Bitcoin halving means for BTC mining centralization

0


Industry experts are concerned the upcoming Bitcoin (BTC) halving could lead to increased centralization. 

The fear is the reduction in block rewards will make older mining equipment unprofitable, concentrating hashing power in the hands of fewer miners. A trend toward mining pool centralization on the Bitcoin network has been clearly observable over the past few years, but the halving is expected to further exacerbate the issue and accelerate the trend.

Historical data gleaned from btc.com shows that from 2016 to 2021, on any given three-day period, the top two mining pools controlled around 30–40% of the hash rate.

Hashing power is far more centralized lately. On Feb. 28, the top two mining pools, Foundry USA and AntPool, controlled almost 50% of the network’s hashing power, according to Coin Dance.

Data from mempool.space shows that 26.55% of the total blocks have been mined by unknown or unaffiliated sources since Bitcoin’s inception. Mining pools, such as F2Pool, mined 10.11% of all blocks over that period, while AntPool mined 10.02%.

In the last three years, however, mining pool Foundry USA mined 21.55% of all blocks, AntPool mined 18.78%, and F2Pool mined 14.25%.

In the past three months, the centralization has increased, with Foundry USA mining 30.32%, AntPool mining 26.03%, ViaBTC mining 12.52% and F2Pool mining 11.94%.

The problem of centralized mining

Jesper Johansen, founder and CEO of venture capital firm Northstake, is one of the figures predicting increased volatility for BTC mining, leading to increased centralization.

Johansen told Cointelegraph: “The halving will lead to hash rate volatility, as miners facing higher operating costs and outdated setups will go offline. This will further centralize hash rate, with large-scale mining pools operating with significantly lower marginal cost per hash rate — thus intensifying centralization concerns.”

Recent: Murder by (smart) contract: Ari Juels publishes crypto thriller

As for why this is a problem, Johansen highlights two main areas where challenges may arise, undermining Bitcoin’s decentralized credentials:

“First, with significant control over the mining process, centralized entities might have the undue power to censor transactions by choosing not to confirm them, which conflicts with Bitcoin’s ethos of decentralization and censorship resistance.”

“Second, centralized mining pools could exert disproportionate influence over decisions regarding Bitcoin’s protocol updates or changes, potentially skewing development in favor of their interests rather than the broader community,” he added.

Bitcoin researcher Chris Blerc has long been sounding the alarm on centralization. As Blerc argues, centralized mining creates numerous risks for BTC, including the potential blacklisting of certain products, such as coin-joining services.

In December 2023, Blerc took to social media platform X to highlight that the two major mining pools controlled 55% of the hashing power. The top two mining pools, AntPool and Foundry USA, are both regulatory compliant and require all miners to fulfill Know Your Customer obligations — ostensibly placing control in the hands of U.S. regulators.

“We could be one chess move away from some big problems for Bitcoin. But even worse is the fact that nobody really wants to talk about it. Where’s the urgency?” asked Blerc.

Censored Bitcoin

The argument of whether Bitcoin centralization will lead to censorship may be a moot point, as existing research has already uncovered one mining pool filtering or censoring some transactions.

In November 2023, Bitcoin developer 0xB10C reported on a number of transactions that may have been filtered out of blocks by mining pools. The suspect blocks all contained addresses sanctioned by the United States Office of Foreign Assets Control (OFAC).

From six candidate blocks, 0xB10C identified four blocks believed to omit OFAC-sanctioned addresses.

All four transactions were ignored by the F2Pool mining block. 0xB10C ultimately said, “These four missing sanctioned transactions lead to the conclusion that F2Pool is currently filtering transactions.”

That opinion was vindicated in short order as F2Pool confirmed that it had filtered transactions. Following community pushback, it then announced it would reverse the decision “for now.”

It’s worth remembering that even if one mining pool filters out a transaction, that does not stop the transaction from being processed, but it does potentially result in that transaction taking longer to process. The more mining pools that filter it, the longer the potential delay. 

Pursuing profitability

While the halving of block rewards may make mining less profitable, some scenarios could offset the reduction in income. The simplest of these scenarios would be if the price of Bitcoin doubled against the U.S. dollar. That may be too much to hope for, but there are other potential avenues for pursuing increased returns.

As Acheron Trading CEO Laurent Benayoun told Cointelegraph, miners already have more than one way to make a profit.

“Miners’ compensation consists of two parts: newly minted BTC, as well as fees offered by the users of the network featuring an auction mechanism for transaction processing priority,” says Benayoun. He adds: “The halving of block rewards could shrink miners’ profitability and put a fatal strain on less efficient mining operations, leading to more centralization, as had been the case in the past. Yet, the recent network congestion stemming from the Ordinals innovation has led to an increase in network fees.”

Benayoun believes Ordinals could actually prove beneficial since “it is possible that the decrease in miners’ comp from the halving will be compensated by the increase in comp from higher fees.”

And while the increase in fees alone might not be enough to make up the shortfall, the slowing of the supply inflation could further compensate miners in dollar terms, “counteracting the effects of halving on mining rewards even more.”

Dealing with centralization

There are many ifs and buts when dealing with the issue of hashing power centralization, but if the rising price of Bitcoin and transactions doesn’t absorb the decrease in mining rewards, further solutions may be difficult to come by.

Recent: Energy-efficient miners in US less likely to be impacted by Bitcoin halving

According to Johansen, any drastic proposal to mitigate the issue would undoubtedly face serious opposition from Bitcoiners.

“Solutions would involve modifying the mining algorithm or adjusting rewards to favor decentralization,” says Johansen. “However, these changes necessitate widespread community consensus, which is difficult, given the Bitcoin maximalists’ reluctance to protocol changes.”

Ultimately, even if the halving causes a few additional bumps in the road for miners, the only realistic choice will be to ride it out.