Miners play a crucial role in the Bitcoin ecosystem. By securing the network, they are directly rewarded by the very system they protect. However, it’s important to remember that hashing to solve blocks is just one part of the mining process. Bitcoin mining ASICs are designed solely for this purpose. In today’s environment, most other aspects of mining, such as constructing a block template, are typically handled by mining pools. The Full-Pay-Per-Share (FPPS) payout model, being the most popular due to its steady and predictable revenue, has led a small group of pools to become custodians of almost all newly created Bitcoins. This setup helps miners manage their businesses effectively, given their regular monthly expenses. But has this comfort of predictable payouts contributed to such a high degree of centralization that it poses a serious threat to Bitcoin? Let’s dive into the trifecta of mining pool centralization, custodian consolidation, and a near-monopoly in the ASIC miner market.
Top 2 Mining Pools at >50% of Hashrate
Custodian Consolidation
Proxy Pools
Capital Intensive FPPS The Underlying Issue
The Hegemony of ASIC Hardware Manufacturer Bitmain
A Threat to Censorship-Resistance and Security
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Top 2 Mining Pools at >50% of Hashrate
Bitcoin mining pools are centralized businesses that act as third-party service providers for miners seeking more predictable revenue, and today they play a crucial role in the mining ecosystem. When looking at hashrate distribution, the top two pools, Foundry USA and Antpool, together account for over 50% of the global hashrate. Although this level of centralization is not ideal, many miners are comfortable with it, as moving their hashpower from one pool to another is relatively simple.
However, a closer look reveals that the idea of switching pools offers a false sense of security. While the remaining hashrate is fairly well-distributed among smaller pools, custodian consolidation and proxy pools suggest a deeper concentration of power within the mining ecosystem.
Custodian Consolidation
In any block, the entity that constructs the template must specify where the newly created coins will be sent in the generation (or ‘coinbase’) transaction. Most pools pay themselves in this transaction and later pay their miners from earlier blocks or other sources. In April of this year, Mononaut from mempool.space discovered that a single custodian controls the addresses associated with at least eight mining pools, representing 47% of the network hashrate.
AntPool, F2Pool, Binance Pool, Braiins, BTC.com, SECPOOL, and Poolin all sent their mining reward outputs to a single entity. This custodian has been identified as Cobo, a digital asset custody provider specializing in B2B services. The company supports 500 institutions and manages billions in assets. As a result, this single company effectively controls the distribution of at least 47 out of every 100 newly mined bitcoins.
Individuals and businesses may prefer using a custodian for Bitcoin, as most custodians offer a convenient, user-friendly experience similar to traditional banking, handling key storage and security complexities. They often implement robust security measures, reducing concerns about managing private keys and operational risks. The choice between using a custodian and opting for self-custody depends on individual priorities and risk tolerance. However, the reliance of so many mining pools on a single custodian is concerning. It contradicts Bitcoin’s self-custody mantra, ‘not your keys, not your coins,’ and suggests a close relationship between entities that are often perceived as genuine competitors.
Proxy Pools
Around the same time, Bitcoin chain analysis expert 0xB10C discovered that many of these pools are receiving identical block templates and transaction prioritization lists from Antpool. This suggests that several mining pools are essentially operating as proxies for a primary pool responsible for creating block templates, managing transaction prioritization, and distributing block rewards. What were once considered independent pools with competing interests and checks and balances are, in reality, part of a single entity that now controls nearly 50% of the network hashrate.
Capital Intensive FPPS The Underlying Issue
Mining pools typically use two main payout models: FPPS (Full Pay Per Share) and PPLNS (Pay Per Last N Shares). FPPS offers consistent payouts to miners, even on days when the pool doesn’t find as many blocks, but this can result in potentially lower overall revenue due to the pool needing to take a large enough cut to sustain itself during periods of poor luck. PPLNS, on the other hand, reduces the pool’s role significantly by shifting the variance onto the miners, thus eliminating the need for reserves. This results in greater overall revenue but introduces more payout variability, as miners are only paid when the pool finds blocks.
Due to their stability and predictability, FPPS pools have become very popular over the last few years. However, running an FPPS pool requires substantial capital reserves to manage variability in block production and maintain consistent payouts. This need for significant capital contributes to the centralization of large mining pools. Many FPPS pools have partnered with Antpool, which is owned by Bitmain Technologies Ltd, the largest ASIC manufacturer with substantial Bitcoin reserves.
Bitmain offers insurance against bad pool luck for miners, but this comes with the condition that miners must use Bitmain’s block templates and transaction prioritization. Additionally, miners are required to pay the mining rewards to Bitmain for later distribution, which effectively centralizes mining operations under Bitmain’s control.
The Hegemony of ASIC Hardware Manufacturer Bitmain
While Antpool operates independently, it benefits from close integration with Bitmain’s ASIC hardware. Since launching its first Antminer in 2013, Bitmain has dominated the ASIC market, currently holding over 75% of global market share. This dominance is largely due to economies of scale, which allow Bitmain to produce hardware at lower costs and secure chip wafers from semiconductor foundries. The image below illustrates that the Bitcoin network is primarily dominated by Bitmain’s Antminer S19, S19j Pro, and S19XP models, with the S21 series being steadily rolled out throughout 2024.
Recent technological advancements from competitors like MicroBT and Canaan, as well as new entrants such as Auradine and Bitdeer (which acquired DesiweMiner), are beginning to erode Bitmain’s market share. However, ASIC manufacturers need to invest tens of millions of dollars in R&D and secure enough chip wafers to scale, which can be challenging. While Bitmain’s dominance in the mining hardware market is facing increased competition, it will likely be some time before the industry leader is dethroned.
A Threat to Censorship-Resistance and Security
On an industrial scale, Bitcoin mining has evolved to the point where decentralization often takes a backseat, with many operations focusing solely on fiat profitability. While custodians do not directly undermine the network’s decentralization, allowing a single entity to control the keys to nearly half of newly minted Bitcoin is concerning. The industry should advocate for miners to take self-custody of their funds, create their own block templates, and mitigate centralization risks wherever possible.
Bitcoin mining is diverse, including everyone from home miners using BitAxe equipment to large industrial entities, which helps maintain the network’s overall decentralization and resilience. However, the centralization of mining pools remains a significant issue that needs addressing. The risk of a ‘51% attack’ is already a pressing concern, as only 20-30% of the network hashrate is needed to effectively execute such an attack. With just a few entities controlling the transactions included in nearly every block, the two largest pools can impose censorship with certainty. This situation directly undermines Bitcoin’s goal of being a truly permissionless currency.
The solution to centralization issues is reminiscent of a public awareness campaign launched in the 1990s in the Netherlands. The campaign, with the slogan ‘Een Beter Milieu Begint Bij Jezelf,’ translates to ‘A Better Environment Starts with Yourself.’ It aimed to encourage individuals to take personal responsibility for environmental issues and make small, actionable changes in their daily lives, such as recycling and reducing waste. Similarly, instead of relying on major miners to improve their business practices for the benefit of Bitcoin, individual miners should take responsibility by making informed choices about their ASIC hardware, mining pools, and custodial solutions.
Although solving the centralization problem is challenging, initiatives from mining pools like OCEAN offer alternatives for miners seeking to manage their assets more independently and reduce centralization risks. OCEAN offers full visibility into block templates, payouts, and miner stats, empowering you to see exactly what your hashrate is mining. Try it now, it is easy to join and use!
