Is bitcoin becoming more or less decentralised over time?
Mining pool hashrates are just the tip of the iceberg. The real answers are underwater.
Canadian financial services firm Canaccord Genuity has released a new report saying bitcoin is getting more decentralised over time. To support this, it points at the distribution of bitcoin hashrate across the network in previous years compared to now.
Unfortunately it's not that simple.
There are different ways of looking at the numbers.
The report points at the increased diversification of bitcoin's hashrate now relative to 2014, when a single mining pool, Ghash.IO, controlled more than 50% of hashing power. Things are a lot more spread out now, says Canaccord Genuity, with the market being divided among more participants, none of which has more than 20% market share.
Unfortunately for good news fans, this is an oversimplification.
The main issue is that Bitmain controls both the BTC.com and AntPool mining pools, and is the primary investor in ViaBTC. Its hashrate market share is closer to 40% than 20%.
And market share tends to fluctuate quickly. The numbers are quite different today (12.3% market share for AntPool and 17.4% for BTC.com) than it was a week ago when Canaccord Genuity picked out its data.
It's also an oversimplification to say bitcoin is even trending towards decentralisation since 2014, as Bitmain is believed to have hit about 51% hashrate control in mid 2018. And by some measures, bitcoin's hashrate is actually more centralised now than it was a year ago. Bitcoin's hashrate centralisation moves in ebbs and flows, rather than clearly moving towards either more or less decentralisation.
Canaccord Genuity also points at gradual plateauing of ASIC miner development, which has put the manufacturers on more equal footing and improved competition.
"Advances in ASICs have slowed allowing for broader competition for bitcoin's mining rewards," it says. Essentially, Bitmain used to have a big edge thanks to its scale, but now all manufacturers are working at a more similar level which lets them all compete in the market.
But this may also be an oversimplification, and overall diversity of the mining manufacturer market doesn't necessarily impact how centralised or decentralised individual coins are.
There are a lot of cryptocurrencies beyond bitcoin, and the economics of mining specifically encourage manufacturers to monopolise individual cryptocurrencies and mine with their own gear. This is because in most cases the block rewards for a single cryptocurrency just aren't big enough to support multiple mining manufacturers.
What this means is that, functionally, how decentralised a coin can get depends on its price and total mining rewards.
Consider how much money is actually in bitcoin mining. Over the last 24 hours the block rewards have been about US$7 million at current prices. Assuming it all stays the same, this is equivalent to about $2.55 billion per year. That's not a lot, and there's every reason to doubt that the bitcoin ASIC mining business can sustain healthy competition on this diet.
For perspective, there's maybe 5 to 10 times as much money in GPU markets as a whole than bitcoin mining per year, and that's still solidly locked up by NVIDIA, AMD and Intel. Also for perspective, the ketchup market in the USA alone is worth $8.4 billion per year. In the grand scheme of dollars, bitcoin really is a small fry.
This degree of market centralisation is not a unique problem to bitcoin, as economies of scale and other benefits tend to reward the biggest players in any industry. The main reason it's especially relevant to bitcoin is because bitcoin needs to be decentralised despite the capitalistic entropy pulling it in the other direction.
In other industries this problem is solved by regulation. But for obvious reasons this won't work for bitcoin.
It's easy enough to pick out point-in-time mining pool statistics to extrapolate that bitcoin is becoming more decentralised, but it's also not necessarily the most useful exercise.
So in the end, which way will bitcoin be going over time? More or less centralised?
A cursory look at the data says it's becoming more decentralised, a closer look says it might not be that simple and an even closer look than that says no one really knows. There are moving parts which have yet to be effectively measured.
Disclosure: At the time of writing the author holds ETH.
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