Breaking ChatGPT’s Bitcoin FUD #8: Mining Centralization – part 2

Breaking ChatGPT’s Bitcoin FUD #8: Mining Centralization – part 2…

Vlad Costea’s “Breaking FUD” series continues with the 8th “top threat” to Bitcoin according to ChatGPT. Let Vlad show you the truth on Bitcoin mining and how Bitcoin is decentralized regardless of what ChatGPT tries to tell you.

On to the segment from the e-magazine “BTCTKVR 3: Breaking FUD”, released May 2023. I’ll keep posting the rest of this e-magazine over the coming days.

“Breaking ChatGPT’s Bitcoin FUD #8: Mining Centralization – part 2

51% ATTACK, MINING, BITMAIN, CHINA / USA, POW

A mining pool is a voluntary association of miners who want to maximize their chances to get rewards more frequently. By putting together their hash power, they become a pool and share the revenue according to the amount of contribution each member brings. For example, someone who mines from Bhutan using hydro energy may find it way too hard and unreliable to find Bitcoin blocks all alone. So they look at existing mining pools and pick the one which charges the lowest fees. There are large mining pools from China (F2Pool, AntPool, ViaBTC), large mining pools from the United States of America (Foundry, MARA Pool, Luxor), and there’s also a smaller option from Europe (Braiins).

The miners from Bhutan can pick any pool…

and flip flop between them at will. Naturally, they will search for the best balance of predictability and high rewards. Though the largest mining pool offers the most frequent payouts, the smaller ones have lower fees and offer extra services such as free firmware updates to boost your hardware’s efficiency and advanced profitability calculators. It makes no sense for everyone to go towards the biggest player – as the “small fish in a large tank” situation isn’t always the most effective way to make money and free markets provide incentives to support competition.

Assuming that the Bhutan miners pick a pool which is secretly malevolent and will attack Bitcoin as soon as the 51% hashrate mark is hit, this scenario doesn’t mean that the Bhutanese participants must be on board with the decision. They can leave the pool which acts in bad faith and contribute towards restoring the balance somewhere else.

In some cases, 51% attacks can be profitable for the miners. But this destructive short-term bet will only harm the long-term business at large. Assuming that every participant acts in the most rational economic way, it makes no sense to accept a short-term big payout instead of protecting a source of revenue that can bring higher rewards over an extended time frame. It’s as if a farmer gets paid a lot of money to burn his crops – it may be momentarily tempting, but what’s the point of risking his reputation and means to make a living when he can harvest the land for many more years in order to make a decent living?

Furthermore, if Bitcoin is under attack it’s likely that the market participants will panic and crash the price. So the potential rewards at the end of a successful attack are significantly lower, as everything is in BTC. Sure, the attackers can use US dollars to short the price on some exchange… but they have no guarantee that their attempt would succeed and they’re only exposing themselves to more risk. An unsuccessful 51% attack makes the entire effort a waste of time and energy, destroys the reputation of the attackers, and only strengthens the Bitcoin network to better respond to such a threat. But now we’re assuming that such a coordination is possible, though history teaches us that it hasn’t happened in times when the probability seemed high.

As of May 2023, there’s geopolitical multipolarity in Bitcoin mining pools. The Chinese miners, who have been suspected of one day colluding to launch a 51% attack against the network, still retain about 40% of the hash power across a handful of pools. Meanwhile, the US and European mining pools also add up to roughly 39%of the hash power. In the event of a totalitarian takeover in China or the US, which results in a politically motivated attack against Bitcoin, no party can gain the necessary majority.

Furthermore, just because the pool is from China or the USA doesn’t mean that the miners must be physically located in the same country. As a Romanian who might be mining from home, I am free to either launch a lottery ticket as a solo miner and only get the entire block reward by sheer luck, or else join any pool which offers me the best balance of low fees and high rewards at a predictable rate. “

Vlad continues his exploration of Bitcoin mining. See you in part 3 of 3 on Bitcoin Mining Centralization FUD.

I’m Charles Polanski and I seek to turn the Bitcoin-curious into Bitcoin investors and enthusiasts.