Everything in Bitcoin is decentralized — except the blocks
Why nobody can ever truly “win” Bitcoin mining
Nikolas Gregor/Shutterstock and Adobe modified by Blockworks
This is a segment from the Supply Shock newsletter. To read full editions, subscribe.
Eleven years ago to the day, the Bitcoin space was grappling with the ballooning hash rate of one massively popular mining pool: Ghash.io.
Ghash, which was owned by CEX.io (an exchange still operating today) was widely considered the best mining pool in 2014. It had automatic payouts and ultra-low fees, and it even shared transaction fees with the entire pool, whereas others tended to keep those for themselves.
There was also clear and responsive tooling for tracking hash rates and incomes, and it supported more merge-mined coins than any other pool. Users could even trade hash rate and mining contracts via the CEX.io platform.
One problem: Ghash was attracting too many miners.
“The people behind GHash are to mining as Mark Zuckerberg is to social networking,” one Reddit user wrote. “If there wasn’t a 50% concern they would have over 90% of the pooled network by now I’m sure.”
Users on Bitcointalk had been sounding the alarm. “GHash is at 48% WTF. This is fucking serious people get off GHash the consequences for 51% are huge. It could be detrimental for bitcoin going forward. Once people realize that the Achilles heel in bitcoin is real, they’ll permanently mark it with a negative stigma.”
Discus Fish, the second-most powerful pool at the time, only had 11% of the total hash rate.
“Bitcoin pirates with their DDOS botnets” is a great name for a punk band.
It was also the second time in six months that Ghash’s popularity had become an issue. After gathering 42% of the hash rate, the pool released a memo stating it would restrict registrations for new miners and pledged to help its existing users diversify into other pools. Many miners exited Ghash, dropping its share of the hash rate back to 38% within a day.
So by the time Ghash’s hash rate had swelled to 50% at multiple times in a week, five months later, it was up to BitFury to scale its pooled operations back significantly, starting with 1 PH/s (about 1% of the total hash rate), followed by more petahashes over a 72-hour period. Ghash’s influence would fade over the next six months, shutting down completely by early 2015.
Bitcoin is, of course, optimal when no one entity controls even close to half of the hash rate. It doesn’t matter if it’s a mining pool, made up of thousands of individual miners, or a multi-billion dollar mining behemoth.
On a technical level, the danger for malicious double-spending is clear. In the real world, these types of situations tend to be more of a temporary branding issue, and the ecosystem has historically mitigated the issue quickly enough.
The panic spread over to mainstream media, which reflected concerns from some Bitcointalk users.
These days, three mining pools altogether wield more than half of the hash rate — Foundry, AntPool, ViaBTC or F2Pool on any given day.
Is that better than 2014? For sure. But it could still be better. Alejandro de la Torre, CEO and co-founder of the pool DMND, tells me the issue is not necessarily a problem of potential collusion; it’s that the mining pools themselves are building Bitcoin blocks, rather than the individual miners within the pool.
“Everything is decentralized except for the blocks. Let’s say the top five players build more than 80% of the blocks. These top five players, half of them are in the United States, the other half are in China. So what if the Chinese government comes in and says, ‘Hey, stop doing that, or start having this’? Or the Americans say, ‘You need to do all this compliance or we’ll send your ass to jail.’”
De la Torre worries such measures are very simple for governments to take — it just means knocking on the doors of the top mining pool operators. “It’s a huge risk for Bitcoin, the biggest risk right now in Bitcoin.”
Similarly to OCEAN, DMND’s solution is to decentralize the responsibility of forming blocks away from the pools and toward whoever actually generates the correct hash, thereby reducing the threat of government intervention. There would be a higher chance that every other block would be constructed by a different miner within the pool, ideally each one in a different physical location.
Efforts like these may seem like competition, even among pools for miner mindshare. But that’s only on the surface.
Underneath, miners and the pools they use can only ever serve one master, the Bitcoin protocol itself — regardless of who they’re supposed to enrich.
Get the news in your inbox. Explore Blockworks newsletters:
- The Breakdown: Decoding crypto and the markets. Daily.
- Empire: Crypto news and analysis to start your day.
- Forward Guidance: The intersection of crypto, macro and policy.
- 0xResearch: Alpha directly in your inbox.
- Lightspeed: All things Solana.
- The Drop: Apps, games, memes and more.
- Supply Shock: Bitcoin, bitcoin, bitcoin.
