Bitcoin mining centralization problem may be exaggerated, what can miners do?

Many people believe that the current level of centralization in Bitcoin mining is the biggest problem with this peer-to-peer electronic cash system. For electronic cash technology that relies on decentralization to resist censorship, any sign of centralization is problematic.

In 2014, economist Kevin Dowd said that the reward system for mining pools would “destroy the Bitcoin system.” The share of Bitcoin mining in China has led former Bitcoin Core developer Mike Hearn to say, “Bitcoin is controlled by the Chinese government.”

Those who believe that Bitcoin mining is already highly centralized point to several facts, such as the use of ASICs, the concentration of mining locations, mining strategies that lead to centralization, etc. Recently, Paul Sztorc, an economist at Bloq, explained that the problem of Bitcoin mining centralization may be exaggerated.

“From my perspective, mining is an aspect of how Bitcoin works, and Bitcoin is protected by some incredible mechanisms that were created before mining,” Sztorc said.

Efficient miners protect the network

The key point Sztorc mentioned is that miners are always looking for the most efficient way to mine. The reason for mining in China and using special hardware is the same, both are to seek maximum efficiency.

“They are all complaints about efficiency, and all miners must be as efficient as possible, otherwise they will be eliminated by the protocol,” Sztorc said. “Increased efficiency is a good thing because it increases the hash rate of Bitcoin.”

According to Sztorc, the fact that mining is done in China actually makes Bitcoin attacks harder to carry out. “If there were no Chinese miners, it would be cheaper to attack Bitcoin — it would be even cheaper from China,” he said.

Sztorc believes that mining is concentrated in China because it is more efficient there. This increases the network's computing power and protects the security of the Bitcoin network. This makes attacks costly because miners and mining hardware have become more specialized in recent years, and the choice of where miners mine is also a reason why attacks are costly.

Everyone uses the best strategy

An alternative strategy can be used to increase one’s own profits, but at the expense of other miners. In 2013, Ittay Eyal and Emin Gun Sirer of Cornell University claimed that there is a mining strategy called “selfish mining” that can fundamentally undermine Bitcoin.

Sztorc disagrees. “If everyone copies this selfish mining strategy, before you complete the process, you’re back to where you were before,” he said.

Simply put, selfish mining is a mining strategy that treats miners who discover new blocks differently. A miner deceives other miners by not broadcasting the longest chain information, wasting their computing power. This maximizes the interests of the selfish miner, which will lead to more miners joining the selfish miner's mining pool, so the computing power share of this group of miners will increase.

According to Sztorc, the problem with this theory is that miners have every incentive to use the most efficient mining strategy. Just like miners use ASIC hardware and choose regions with cheap electricity, if the selfish mining strategy is the most efficient, every miner will adopt it.

"People will continue to hurt each other until they get back to their starting point, at which point everyone realizes they're only hurting themselves, and they stop doing it, because no one is bored enough to try this strategy," Sztorc explained.

Sztorc also pointed out that best practice strategies will be copied by other miners, and users of higher hashrate networks will benefit.

What can miners do in mining centralization?

Finally, we must remember that there is not much miners can do in the face of hypothetical centralized control. An individual miner can only filter the transactions included in the blocks he mines, but when a miner or mining pool controls more than 50% of the computing power, they can filter or reorder transactions.

“Using 51% hash power, a miner can reorder and refilter recently issued transactions at great cost and risk,” Sztorc explained. “If the attack fails, for any number of reasons — double agents, bad luck, or human intervention, etc. — then the attacking miner loses money and the adversary miner wins.”

“The bigger risk is that if the attack is successful, the value of all the mining equipment goes to zero,” Sztorc said.

In Sztorc’s view, any type of miner attack is against Bitcoin developers and users. They can change the hash function of the proof-of-work mechanism, which is tantamount to opening fire on the entire mining community.

Once privacy and anonymity are built into Bitcoin, miners won’t even be able to find targets to attack. Sztorc also believes that the implementation of second-layer protocols, such as the Lightning Network, will further weaken miners’ control over Bitcoin.