Is the concentration of miners again jeopardizing Bitcoin? Not exactly

OOne of the main pillars of Bitcoin’s value proposition is decentralization. Why then does the computing power behind the biggest cryptocurrency seem to be concentrated in one place again, this time in North America? The answer is multifaceted, but some of the main reasons boil down to where it is safest in this geopolitical environment and most profitable for miners to operate.

This article is part of Bitcoin Mining Week series.

Following China’s sweeping crackdown on the country’s crypto industry last year, miners shut down and fled to other parts of the world, where the geopolitical situation is more stable and the cheap energy is plentiful. They moved largely to North America, especially the United States

According to a report published by the Cambridge Center for Alternative Finance (CCAF) in October, the United States accounted for 35.4% of Bitcoin’s global computing power, or hashrate, at the end of August, more than double the share of 16.8% at the end of April. . Kazakhstan and Russia followed the United States with hashrate shares of 18.1% and 11%, respectively, at that time. Meanwhile, mining operations in mainland China had effectively fallen to zero, from a high of 75.53% in September 2019.

Read more: How Bitcoin Mining Works

More recently, digital asset investment firm CoinShares, said in a research report that the world’s largest mining country was the United States with around 49% of the total global hashrate located in the region, as of December 31, 2021. .

This concentration goes against bitcoin’s promise of a decentralized network, where, in an ideal world, hashrate would be evenly distributed globally. But the reality is far from ideal and given the geopolitical instability in some key regions, the trend of miners moving to the United States is likely to continue.

“Ideally, miners would distribute Bitcoin hashrate across the globe and in multiple jurisdictions, but they would migrate to the most favorable trade, energy, and political climates they could find – that’s why they come to the United States” said Colin Harper, head of content and research at crypto software and services firm Luxor Technology.

It’s not hard to see why a miner would rather be in North America than anywhere else as lawmakers around the world begin to crack down on crypto miners. Kazakhstan, which was a popular destination for miners leaving China, demanded higher taxes, cut electricity and cracked down on illegal mining operations. In February, Hong Kong-based cryptocurrency miner BIT Mining (BTCM) halted its nearly $10 million mining data center construction project in Kazakhstan, citing unstable local power supplies.

Read more: The State of Bitcoin and Ethereum Mining in 10 Charts

Also, recently, a Proof of Work (PoW) ban narrowly failed in a committee vote of the European Union Parliament. Russia has its own geopolitical problems right now.

Rule of law and cheap electricity

Having the assurance that an entire industry will not simply be uprooted or disrupted overnight by the government is one of the main considerations for anyone considering starting a business, especially in an industry as young as crypto mining. .

This arguably makes the United States, with its constitutional protections and federal system, the safest place for minors. “The United States is one of the best countries to experience hashrate concentration because the federal structure of the United States guarantees strong rule of law and strong state rights,” Luxor’s Harper said.

Particularly after miners have been burned by China’s ban, a repeat of such total business disruption would be costly, especially as the industry has become brutally competitive, while margins have fallen from their peak. from 90% to between 60% and 70%.

Read more: Why are old companies getting into crypto mining? Simple: big profits

“If there were to be a single country hosting a large percentage of the network’s hashrate, then I’m glad it was the United States, given its federated system in which individual states have a great deal of autonomy in legislation within their borders,” said Jurica Bulovic, mining manager at Foundry (a subsidiary of Digital Currency Group, which also owns CoinDesk).

“This lessens the risk of a nationwide savage ban on bitcoin mining, as we have seen in China,” Bulovic said.

Or, as Bryan Bullett, CEO of mining company Bit Digital put it in October: “No one wants to operate in an area where they face existential risks.”

Dave Perrill, CEO of data center operator Compute North, said the United States also had better access to infrastructure and lower energy costs.

However, such a concentration of miners relocating to the United States has begun to anger lawmakers and regulators, given the massive demand for energy from these companies.

In March, the New York State Assembly Environmental Protection Committee voted in favor of a bill banning proof-of-work (PoW) cryptocurrency mining for two years. . Meanwhile, some federal lawmakers led by Sen. Elizabeth Warren (D-Mass.), have scrutinized crypto mining companies on their climate impact.

More recently, the United States Securities and Exchange Commission (SEC) proposed new regulations that would require publicly traded companies to report information on greenhouse gas emissions and climate change risks, which would affect miners due to their energy consumption. However, the mining community, for the most part, welcomed this proposed rule.

Read more: Bitcoin Mining and ESG: a heavenly encounter

However, Washington is unlikely to try to completely ban digital asset mining, as many states have already embraced the industry.

“It is unlikely that the federal government will decide to ban or disrupt mining, and if it did, the decision would have to go through the federal courts, not to mention that the states would fight tooth and nail against a POW ban,” Harper said.

To complicate matters for policy makers, the mining industry has already become a multi-billion dollar industry. In a February 28 research note, Wall Street B. Riley bank analyst Lucas Pipes wrote that the industry has already reached almost $100 billion in raw bitcoin value to be mined.

“Simply put, to derive the total industry value, we multiply the coins to be mined by the current price of BTC plus transaction fees. Today, that value is around $92 billion,” a- he said, using a bitcoin price of $38,000.As of this writing, the bitcoin price had rallied to $44,000.

Such a large industry will likely be difficult to eliminate completely in a short period of time.

Read more: Crypto Mining, the energy crisis and the end of ESG

Bitcoin Mining Pool Concentration

Another threat to bitcoin’s decentralization is a handful of mining pools controlling too much hashrate.

“Mining pools are, by definition, a centralizing force in the Bitcoin mining ecosystem,” said Bulovic of Foundry. “They provide a hashrate aggregation service of individual miners to minimize inherent earnings volatility and provide stable payouts.”

Read more: What are Bitcoin mining pools?

Foundry USA is the largest bitcoin pool in the world, with nearly 20% of the network’s total hashrate, according to data as of March 25.

Bitcoin pool distribution.  Source: BTC.COM

This concentration may appear as another threat to the decentralization thesis. However, mining pools do not control the network and do not have much influence, as any miner can quickly switch pools if there is a hint of foul play, such as censorship of bitcoin transactions, Bulovic said.

“In addition, there are developments such as Stratum V2 which, among other things, would allow individual miners to build block models, taking that power away from mining pools,” he added. Stratum-V2 is a new bitcoin mining protocol being developed, improving many aspects of the previous version, Stratum-V1, which miners use to communicate with mining pools. Improvements include more efficient data transfer and protections against network centralization.

“Stratum V2’s comprehensive feature set gives the miner the choice to select their own set of transactions and build their own block models [that determines which transactions go inside them], making it easy for miners to revolt against pools that misbehave on censorship to the detriment of the broader Bitcoin network,” according to a recent research report by Rachel Rybarczyk, VP of Galaxy Digital Mining. “Even if miners don’t use this power, the mere threat they might deter pools from misbehaving.”

Self-interest and bitcoin mining

Figures showing regional concentration and the outsized market share of mining pools on the total hashrate look like a threat to decentralization. However, as long as their motivation is profit, it would be counterproductive for miners to attack the network by banding together.

“To assert a threat to decentralization, miners are ultimately acting in their own self-interest,” Harper said, noting that they compete with each other and would have no interest in cooperating in attacking the network that generate their income. And a purely malicious non-profit actor (e.g. a hostile state) would find an attack difficult and expensive to carry out, given the scale of the competition to mine blocks.

However, such concentration increases miners’ regulatory control of the country in which they establish their business, Harper said.

Fortunately, “I believe the federal structure of the United States provides unique insulation against a state-sponsored attack [against the miners],” he said.

More information on CoinDesk mining week:

After Short-Lived Ban, Upstate New York City Still Relys on Crypto Miners

Cities across the United States are grappling with what it means to have cryptocurrency mining operations in their communities. Plattsburgh offers a case study.

The Rise of Illegal Crypto-Mining Hijackers – and Big Tech’s Response

Cloud providers are fighting cryptojacking, but hijackers are getting more and more sophisticated.

Why Some Bitcoin Developers Say Lasers Can Reduce Mining Energy Costs

The “optical proof of work” would improve the geographic distribution of the hashrate and ease fears of a weather-related pullback, proponents say.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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