Shadow Boxing: Commentary on Proof-of-Work Centralization Hysteria

always relevant marty vent had spiral developer Matt Corallo His podcast This week we’re tackling the nerds on the pressing issue of Bitcoin mining.

To keep everyone informed, recent blockchain research has raised concerns that some pools are getting too cozy.

How do we know this? Well, everyone’s favorite Snoop Mononaut recently pointed out that an unusual percentage of Bitcoin mining rewards are being consolidated under the control of a single custodian.

How bad is it? well 47% of hashrate, on a good day. Yeah, not that good.

Now why would you do something like that in Satoshi’s name?

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First of all, have you looked at the hash rate chart recently? In fact, they are indistinguishable from American fan hockey sticks. Hardware advancements, public balance sheets, and increasing forays into cheap energy sources have turned Bitcoin mining into an arms race. Since China’s mining ban in 2021, the network’s hashrate has increased more than fivefold.

The impact this has had on miners’ margins is self-evident. Everyone is putting pressure on each other. The recent bear market has seen a lot of consolidation, especially on the western front. At the pool level, Foundry was currently the largest backer, with hashrate down to nearly 25% from 35% last year.

The reason they gained dominance so quickly is because of the volatility that Bitcoin users are well aware of. In these cases, it is more often called variance. Others call it luck.

Under the conditions described above, luck can make or break your business. This is why swimming pools exist in the first place. Proof-of-work is a random process, and randomness is a cash flow headache. By combining your hashrate with other hashrates, you can increase your odds and possibly manage a more stable revenue stream.

This is important because once your bill comes due each month, your utility provider doesn’t care about your misfortune. The tighter the margins, the greater the vulnerability. In today’s competitive environment, survival is a question.

What does this have to do with Foundry?

Another way to smooth out miners’ income is to adjust the pool’s payout scheme and remove the difference from the equation entirely. how? You just have to pay for the work, regardless of how often you mine blocks. This process is called Full Payment Per Share (FPPS).

If that sounds expensive to you, that’s because it is. The pool effectively has to cover all payments out of pocket, and hopes to eventually pay itself back with the blocks it mines. If it has a string of bad results and its balance sheet isn’t strong enough to cover the revenue shortfall, Sam Bankman is screwed.

Enter the foundry. Through a combination of uncanny timing, business savvy, and a DCG-sized war chest, they created a financial moat around their pool operations, making it very difficult for smaller players to come in and compete.

Of course, it’s a bit more complicated in practice, but that’s the point.

Back to our little swimming pool and its mysterious caretaker. Have you figured it out yet?

The same game is being played on the other side of the pond. It is very likely that the emergence of the Foundry as a major player exacerbated the dynamics presented above and forced smaller pools to capitulate.

The execution looks slightly different, but it’s essentially the same model. You can now verify that multiple pools share exactly the same block template. This is consistent with reports that Antpool is offering white labeling services.

you’re right. Proxy mining is clearly a business model.

Moreover, Coinbase’s tally of production suggests that a much larger portion of the hashrate appears to be financing its operations through the same providers.

Put another way, a single entity writes a check for almost half of the network hash rate.

Dollar dollar bills, folks.

If what you say is true. Shaolin and Wu-Tang can be dangerous

As you might expect, this situation has led some speakers to raise some surprising questions about mining centralization. For context, this isn’t the first time mining has been awkwardly integrated.

It seems like every cycle comes with an end to mining centralization. Brouhaha Like clockwork, someone panics and says they need to press the red button.

2008-2012 Emergence of GPU/ASIC

GHash occurred due to network delay between 2012 and 2016

2016-2020 Bitmain Manufacturing Exclusive

Until today in 2020…

— Alex B (@bergealex4) April 25, 2024

As I wrote in this week’s Weekly Re-Org, time is a flat circle. Proof-of-Work Centralization Manbearpig emerges from the cave every cycle. This happens seasonally.

What’s somewhat unusual is that one of the most senior developers in the field completed DEFCON 1.

Now let’s move on to making PoW changes.

— Matt Corallo (@TheBlueMatt) April 26, 2024

I’ll leave it to more serious media outlets like the Bitcoin Bugle to speculate about the strange connections and coincidences between this explosion and recently announced mining ambitions.

Look, it’s not pretty. I think we can all agree that a significant portion of the hashrate is controlled by a small number of bankers. The security of Bitcoin depends on miners meeting their financial incentives. If that’s the result, something is wrong and censorship resistance is at risk.

But that response is not valid. Bitcoin mining has followed a notable growth pattern throughout history, and this one is no different. This is a market driven by economics, not code. Inefficiencies occur at every stage and are weakened as the industry develops.

I understand that everyone who owns a keyboard looks at everything like a bug, but current reality does not fit this mold.

While everyone applauds the work done on StratumV2 to optimize the mining interface, it is not the answer to the current predicament. Even though they are customizable, transaction templates are still empowering. The pool always reserves the right to reject any transaction it deems haram. It borders on arrogance to patronize operators who show little interest in solutions and miners who do not demand them.

Custom deal selection cannot be trusted for censorship resistance. Only the market can realistically solve this problem, and Bitcoin was explicitly designed to be robust to the majority of miners. Using fees, users create a financial incentive to drive enough hashrate for competing miners to mine their transactions. Interestingly, this means that in a perfect world, all miners would be mining from the same template, i.e. the most profitable template.

In reality, I would say things are a bit spookier. As uncomfortable as it is, censorship is inevitable. After this week’s events, the writing is on the wall and while it is causing a lot of grief for Chinese miners, it seems most likely to come from our side.

The most disappointing aspect of this shake-up so far is the approved changes to the proof-of-work algorithm. The threat posed to us by the state as we speak is particularly aggravating the investigation into the dismissal of miners. It is deaf and shows a complete lack of discernment about the challenges before us. Is anyone willing to divide and conquer?

To make matters worse, we know that throwing the baby out with the bathwater leads to disaster. Change the algorithm. “Fire the miners.” It accomplishes nothing.

Again, the technocratic mindset is blind to problems not solved by pull requests.

Going to the scorched earth ensures that only the most well-funded players can participate in the game. The hashrate can be erased with a single keystroke, but the technology and a large enough bag can withstand a nuclear winter. The ASIC manufacturer market is likely to be reset with a single player already specializing in custom algorithms. Monopolies love good old-fashioned interventionism to eliminate competition.

From a consensus perspective, this idea is so absurd that it goes against the entire premise of the system.

If Bitcoin requires social coordination to moderate market whims and manipulate incentives, it is a failed project. Proof-of-Work is an economic design, not a technical device that can be fixed with code.

Wutang Financial

So what do we make of this? Do you just let go and wait for things to get worse?

Well, I can humbly suggest that we start considering addressing market dynamics through market solutions. Diversify your bonds!

From what I understand, the fundamental problem is related to Bitcoin’s capital markets. Resourceful actors who quickly identified the challenges facing small-scale mining operations have filled the hole in the market, leaving no room for anyone else to work – until now. Economies of scale and perceived risks associated with mining have served to keep competitors at bay.

There is an opportunity here for a few ambitious players to bring balance to this market and raise pooled capital without having to bow down to larger competitors. This won’t happen overnight. Relationships need to be built and the common information asymmetries that plague this market need to be addressed.

This is why we need to stop burning bridges.

Of course, technological improvements may be made to alleviate fundamental differences, but they cannot solve the growing pains of an immature market.

Bitcoin is having a teenage moment in every sense of the word. No one wants to be told what to do, and pushing in one direction will inevitably create resistance. Of course, there may be no rhyme or reason to what some participants decide, but it’s no one’s job to decide.

This too shall pass. until then…

The Wu‐Tang Clan does nothing about F’ Wit.