Are a few big mining pools centralizing bitcoin?

Abstract landscape made of tiny cubes with the Bitcoin symbol

Date Published

06/30/2020

Bitcoin rose to popularity for a number of important reasons: it’s profitable, anonymous, and highly secure. But perhaps its most notable appeal lies in the fact that its network is decentralized.

Bitcoin operates via a peer-to-peer network with no central authority, and the ledger is distributed and maintained by the network itself. These fundamental aspects have always allowed for relative ease-of-entry and a fairly even playing field for miners.

A key component of decentralization says that no more than 51% of the network’s hashing power may be controlled by any one entity (otherwise known as a 51% attack).

Despite this concept on which bitcoin was largely founded, the network may not be as truly decentralized as it once was – or was intended to be.

A few big players

Centralization is not a new concern in the world of bitcoin. Large-scale mining operations have been gaining an advantage on small, at-home miners for a while now – an edge that has only grown more significant in the wake of bitcoin’s reward halving back in May.

For a short period in late-May, two Chinese companies across three separate mining pools controlled more than 51% of bitcoin’s total hashrate:

  • F2Pool – 22.7%
  • BTC.com – 14.7%
  • AntPool – 13.8%

These numbers have since decreased slightly to total 43% as of June 22, but the prospect of a majority control of the total hashrate of bitcoin is clearly real. It is also worth noting that BTC.com and AntPool are both owned by Chinese crypto giant Bitmain.

What would a 51% attack mean?

In a 51% attack, more than half of the network’s hash power is controlled by a single entity – or group of entities with a shared interest.

A 51% attack would allow the controlling attackers to prevent the confirmation of new transactions and to even reverse already completed transactions to then double-spend coins.

Here is how.

We know a new block on the bitcoin blockchain is generated roughly every 10 minutes, and that all solved blocks cannot be altered once completed as the network would notice and reject this.

But if a majority group controls more than half of the network’s power, that group would be able to interfere with this process and prevent other miners from confirming solved blocks, thus taking all the rewards from new blocks for themselves.

This would put the health of the network as a whole at risk. The network is founded on the basis of decentralization, and when that goes away, so does the integrity and good of the network.

Is there a precedent for this?

The concept of a 51% attack used to be merely theoretical – if not almost mythical. Not anymore.

There have, in fact, been numerous instances of 51% attacks taking place in the past, on networks including Ethereum, Bitcoin Gold, Verge, and others – the bulk of which are smaller altcoins. This is largely due to their lesser-stabilized security protocols and lower profile.

The big difference now, though, is that this is not an attack facilitated by a malicious hacker, and it is not on a smaller altcoin network. It is a majority control of the industry’s BIGGEST network by massive industry entities.

So what do we do?

There are a couple of things we can do to prevent against a 51% attack on the bitcoin network.

Limit the size of mining pools

It is undoubtedly easier said than done to convince miners to leave a large pool – especially one with such control and rewards. It is, however, essential to the ultimate good of the bitcoin network. Limiting the size and power of the few dominant mining pools is the first key step in preventing an institutional attack. 

There are several new mining protocols in play that would improve how miners and mining pools work together to secure the network. In the case of Stratum V2, the focus would shift from the centralization of pools to the centralization of individual miners, dramatically redistributing hashrate away from large pools toward smaller, often singular entities.

Ramp up blockchain security

This step falls to the developers of the blockchain networks, who need to work together to test and find weaknesses that need to be sewn up. Several developers of popular cryptos have created such protection against 51% attacks, such as Komodo’s Delayed Proof of Work system and Pirl’s PirlGuard Protection System.

It is ultimately up to the network and those involved to work together to prevent future attacks.

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Date Published

06/30/2020

Author

First Scribe

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