Bitcoin Halving Event Raises Concerns About Accelerated Centralization Among Industry Experts
Summary:
The upcoming Bitcoin halving could exacerbate issues of centralization, according to experts, with older mining equipment becoming unprofitable. The reduction in block rewards might have negative implications as it could increasingly concentrate hashing power in fewer hands. Centralization has been a noticeable trend, and the halving could worsen it. Data shows that top mining pools like Foundry USA and AntPool control a significant portion of the network's hashing power. This could allow these entities to censor transactions and wield undue influence over Bitcoin protocol updates, potentially undermining Bitcoin's principles of decentralization. Mitigating centralization may be difficult if increased prices and transaction fees cannot offset declining mining rewards. Any radical solution could face strong opposition from the Bitcoin community, emphasizing the need to address centralization concerns effectively.
Anxiety is brewing among industry specialists regarding the forthcoming Bitcoin (BTC) halving event, as they fear it might complicate the centralization issue. Their concern is based on a potential decrease in the profitability of older mining equipment following the block rewards reduction, which could result in a concentrated hashing power controlled by a fewer number of miners. The growth of mining pool centralization within the Bitcoin network has noticeably accelerated over recent years, and the halving event could further intensify this trend.
Between 2016 and 2021, data from btc.com reveals that during any three-day span, the commanding two mining pools controlled an estimated 30–40% of the hash rate. A more recent spike in centralization has been observed. On Feb. 28, the primary two mining pools, Foundry USA and AntPool, took control of nearly 50% of the network's hashing power, as per Coin Dance.
Mempool.space's data states that since the inception of Bitcoin, about 26.55% of the total blocks have been mined by unknown or unaffiliated sources. F2Pool mined 10.11% of all blocks during this period, whereas AntPool took 10.02%. However, in the last three years, Foundry USA mined 21.55% of all blocks, AntPool mined 18.78%, and F2Pool mined 14.25%. The centralization has surged further within the past three months, with Foundry USA mining 30.32%, AntPool mining 26.03%, ViaBTC mining 12.52% and F2Pool mining 11.94%.
As explained by Jesper Johansen, Founder and CEO of Northstake, a venture capital firm, the thus resulting centralization might cause a few problems. First, an undue power may be afforded to centralized entities, who might be able to censor transactions by choosing not to confirm them – a violation of Bitcoin's principles of decentralization and censorship resistance. Secondly, he believes that by having too much control over mining operations, centralized mining pools might influence Bitcoin's protocol updates or changes unfairly, potentially catering to their interests over that of the wider user base.
Bitcoin researcher, Chris Blerc, has voiced his concerns stating that central mining practices expose BTC to risks such as blacklisting of certain products like coin-joining services. A mining technique referred to as filtering or censoring transactions was confirmed by mining pool F2Pool, after it was discovered that they had filtered out specific transactions, leading to additional processing time.
Although halving block rewards does introduce potential profitability problems, solutions could come in the form of increased Bitcoin price notations against the U.S. dollar or increased transaction fees. Acheron Trading's CEO, Laurent Benayoun, believes that the recent network congestion from the Ordinals innovation, could be beneficial for increasing network fees.
However, if the growing Bitcoin price or transaction fees cannot compensate the decrease in mining rewards, solving the problem of hashing power centralization might become more difficult. Furthermore, Johansen explains that any significant proposed change to address the issue would meet strong resistance from the Bitcoin community. His belief is that one viable solution may be adjusting rewards to favor decentralization. However, obtaining consensus from the community could prove challenging, particularly from those staunchly opposed to protocol changes. Therefore, despite the potential challenges of the halving event for miners, enduring the situation may be the only practical choice.
Published At
3/1/2024 5:13:00 PM
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