Bitcoin’s value has surged to $61,908. Concerns about mining centralization are rising, especially with the impending halving event. Industry experts worry that the upcoming Bitcoin halving and mining event may worsen the trend towards centralization.
The Bitcoin halving, which reduces block rewards, could render older mining equipment unprofitable. Consequently, this could concentrate hashing power among fewer miners.
The trend toward mining pool centralization has been clear in recent years. The halving could speed up this process. Historical data from btc.com shows that from 2016 to 2021, the top two mining pools had 30–40% of the hash rate.
More alarming is the recent surge in hashing power centralization. On February 28, Foundry USA and AntPool were the top two mining pools. Together, they had nearly 50% of the network’s hashing power, according to Coin Dance.
Data collected from mempool.space reveals a worrying trend in Bitcoin mining. Since bitcoin mining began, around 26.55% of blocks have been mined by unknown sources. Two big players, AntPool and F2Pool, each contribute around 10% of all mined blocks.
Foundry USA, AntPool, and F2Pool became significant players, with over 50% in the last three years. In the last three months, these three big players have been dominating the mining landscape.
With the rising value of Bitcoin, it becomes essential to monitor the implications of mining centralization. Major mining pools are becoming more dominant. This raises concerns about bitcoin halving. Its decentralized nature and long-term sustainability are at risk.
Many in the cryptocurrency community eagerly anticipate Bitcoin halving events. But these events also highlight the ongoing challenges of mining centralization. This issue needs careful consideration.
The challenges of centralized mining
Jesper Johansen started Northstake, a venture capital company. He predicts that BTC mining will become less stable. This could cause more centralization.
Johansen shared with Cointelegraph: “The halving will lead to hash rate volatility, as miners facing higher operating costs and outdated setups will go offline.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.”
Johansen explains two main reasons why this is concerning, which could weaken Bitcoin’s decentralized nature.
“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 expert Chris Blerc has been warning about centralization for a while. According to Blerc, when mining is centralized, it brings various risks to Bitcoin, like the chance that certain services, such as coin-joining, could be banned.
In December 2023, Blerc used the app X to say that two big mining pools held 55% of the hashing power. These top pools, AntPool and Foundry USA, follow regulations and ask miners to complete Know Your Customer checks. This potentially means that U.S. regulators have control over them.
“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.
Exploring censored Bitcoin Halving: Threats and analysis
It seems the debate over whether Bitcoin centralization could lead to censorship might not just be a theoretical concern anymore. There’s some recent research that suggests one mining pool might actually be filtering or censoring certain transactions.
Back in November 2023, Bitcoin developer 0xB10C stumbled upon some transactions that appeared to have been ignored by mining pools. These transactions involved addresses that were on the United States Office of Foreign Assets Control’s (OFAC) sanctions list.
When 0xB10C looked into it further, they found that out of the six blocks they studied, four of them likely didn’t include transactions connected to OFAC-sanctioned addresses.
The F2Pool mining block overlooked the four transactions. In the end, 0xB10C stated, “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 important to keep in mind that if a mining pool filters out a transaction, it doesn’t prevent the transaction from being processed entirely. However, it might cause the transaction to take longer to process. If multiple mining pools filter the transaction, the delay could be even longer.
Achieving profit: Methods & strategies
When block rewards decrease, mining might become less profitable. But there are ways to balance this. For example, if the price of Bitcoin doubled against the U.S. dollar, that would help. It’s a big hope. But, there are other ways to make more money from mining. Acheron Trading CEO Laurent Benayoun told Cointelegraph that miners can profit in multiple ways.
“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,” said Benayoun. He also mentions: “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 thinks Ordinals could be helpful because “it is possible that the decrease in miners’ comp from the halving will be compensated by the increase in comp from higher fees.”
Although higher fees alone might not cover the gap, the decrease in supply inflation could help miners earn more in dollars. “counteracting the effects of halving on mining rewards even more.”
Centralization solutions: Effective strategies
When it comes to hashing power centralization, there are a lot of uncertainties. If the increasing price of Bitcoin and transactions don’t make up for the decrease in mining rewards, finding more solutions could be tough.
Johansen believes that any big proposal to fix the problem would definitely meet strong resistance from Bitcoin enthusiasts.
“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.”
In the end, even if the halving creates some extra challenges for miners, the most practical option will be to endure and work through it.
