Shadow Boxing: Comments On Proof-Of-Work Centralization Hysteria

always relevant Marty Bent had Spiral Developer matt coraro on him podcast This week we address a freak regarding an urgent Bitcoin mining issue.

Just to keep you all up to date, this concern stems from recent blockchain research revealing that some pools are perhaps a little too cozy.

How do we know this? Well, we all love Snoop Mononote recently pointed out that an unusual proportion of Bitcoin mining rewards were consolidated under the control of a single administrator;

How bad?Now about that 47% of hashrate, on a good day. Yeah, it’s pretty bad.

So why would they do such a thing in Satoshi’s name?

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First, have you looked at the hashrate chart lately? In reality, it’s indistinguishable from the hockey stick of US debt. Bitcoin mining has become an arms race, driven by advances in hardware, public balance sheets, and a growing push toward cheaper energy sources. Since China’s mining ban in 2021, the network’s hashrate has increased more than five times.

The impact this has had on miners’ margins is self-evident. Everyone is shutting each other out. The recent bear market has seen a lot of consolidation, especially on the Western Front. At the pool level, Foundry is the biggest beneficiary, accounting for almost 25% of current hashrate, down from his 35% last year.

The reason they have gained so much dominance so quickly is due to the volatility that Bitcoiners are all too familiar with. In this case, it is more often called dispersion. Some call it luck.

In the above situation, luck can make or break your business. That’s why pools exist in the first place. Proof-of-Work is a random process, and randomness is the bane of cash flow. By combining your hashrate with other hashrates, you can improve your odds and perhaps control a more reliable source of income.

This is important. Because once your bill is due each month, your utility company doesn’t care about your misfortune. The narrower the margin, the more vulnerable you are. In today’s competitive environment, survival is key.

What does this have to do with Foundry?

Now, it turns out that another way to smooth out miners’ income is to adjust the pool’s payment scheme and remove variance from the equation completely. how? You just pay them for their work, regardless of how often they mine blocks. A process called FPPS (Full Pay Per Share).

If that sounds expensive to you, that’s because it is. Pools must effectively pay all of their own payments and hope that they can eventually be repaid with the blocks they mine. If you’re consistently underperforming and your balance sheet isn’t strong enough to absorb the revenue shortfalls, you’re like Sam Bankman.

Enter the foundry.Incredible timing, business knowledge, and DCGThey have built an economic moat around pool operations, making it very difficult for smaller players to participate and compete.

Of course, the reality is a little more complicated, but that’s the gist of it.

Back to our little pool and its mysterious caretaker. Do you understand yet?

The same game is being played on the other side of the pond. It is very likely that Foundry’s emergence as a major player has exacerbated the dynamics described above, forcing smaller pools to capitulate.

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

that’s right. Proxy mining is clearly a business model.

In addition to this, aggregation of Coinbase’s output suggests that an even larger proportion of hashrate appears to be funding its operations through the same provider.

In other words, a single entity writes checks for almost half of the network’s hashrate.

Dollar-dollar bills, folks.

If what you say is true.Shaolin Temple and Wutang may be dangerous

As you can imagine, this situation has led some prominent figures to raise worrying questions about the centralization of mining. For context, this isn’t the first time mining has been awkwardly integrated.

As I wrote in this week’s Weekly Re-Org, time is a flat circle. Proof-Of-Work Centralized Management Manbearpig emerges from the cave every cycle. It’s a seasonal event.

What is rather unusual is that one of the most senior developers in the field has gone full DEFCON 1.

We’ll leave it to more serious journalistic outlets like Bitcoin Bugle to speculate about any strange connections or coincidences between this commotion and recently announced mining ambitions.

Look, it’s not pretty. I think we can all agree that it’s terrible that so much of the hashrate is at the mercy of a small group of bankers. The security of Bitcoin relies on miners responding to financial incentives. If that’s the case, then something is wrong and resistance to censorship is at risk.

But that reaction is unwarranted. Bitcoin mining has followed a remarkable growth pattern throughout its history, and this case is no exception. It is a market driven by economics, not norms. Inefficiencies occur at every stage, but are then suppressed as the industry progresses.

I understand that it’s all a bug for people with keyboards, but the current reality doesn’t fit into this framework.

While everyone praises the work that has gone into StratumV2 to optimize the mining interface, it is not the answer to our current predicament. Transaction templates are still allowed even if they can be custom. The pool can reject any transaction it deems to be haram at any time. Patronizing operators who show little interest in solutions or miners who don’t demand them borders on arrogance.

Custom transaction selections cannot be expected to be censorship resistant. Only market mechanisms can realistically address this problem, and it just so happens that Bitcoin is explicitly designed to be robust against the vast majority of mining. Users use fees to create financial incentives for competing miners to drive enough hashrate to mine transactions. Interestingly, this means that in a perfect world, all miners would be mining from the same template, the most profitable one.

In fact, the situation is a little more creepy. This may be unpleasant, but censorship is inevitable. There’s a lot of sadness on the wall for Chinese miners following this week’s events, but it seems like it’s probably coming from our side.

The most disappointing aspect of this uproar so far is that Approving Proof-Of-Work Algorithm Changes. As we speak now, the threats being levied against us by the state have particularly exacerbated the rhetoric regarding the dismissal of miners. It is tone deaf and shows a complete lack of discernment about the task before us. Is there anyone to divide and conquer?

Worse, we know that throwing out the baby with the bathwater is a recipe for disaster. Change the algorithm. “Fire the miners.” That accomplishes nothing.

Again, the technocratic mind doesn’t look at problems that aren’t solved by a pull request.

Scorched earth ensures that only the participants with the most financial resources participate in the game. Hashrate can be erased with the press of a key, but with the technical skill and a big enough bag it can withstand nuclear winter. The ASIC manufacturer market will likely reset to a single player that already specializes in custom algorithms. Monopolies enjoy good old-fashioned interventionism to eliminate competition.

From a consensus perspective, this idea is extremely stupid, going against the entire premise of the system.

If Bitcoin requires social coordination to limit the vagaries of the market and tinker with its incentives, then it is a failed project. Proof-of-Work is an economical design, not a technical mechanism that can be fixed in code.

wu-tang financial

So what should we think about this? Should we just sit back and wait for things to get worse?

Well, I can only humbly suggest that you start thinking about addressing market dynamics with market solutions. Diversify your bonds!

As far as I understand, the fundamental issue is related to the Bitcoin capital market. Resourceful actors who quickly realized the problems facing small-scale mining operations have filled the gap in the market, leaving no room for anyone else to operate so far. Economies of scale and an awareness of the risks associated with mining helped keep competitors at bay.

There is an opportunity here for a few ambitious players to bring balance to this market and allow pools to raise money without bowing to larger competitors. This won’t happen overnight. There is a need to build relationships and address the general information asymmetry that plagues this market.

That’s why we have to stop burning bridges.

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

Bitcoin is in its teens in many ways. No one wants to be told what to do, and promoting a unilateral approach will inevitably lead to resistance. Sure, there may be no rhyme or reason to what some participants decide to do, but that’s not the place for someone to decide for them.

This too shall pass. Until then…

Wu-Tang Clan Ain’t Nuthing ta F’ Wit

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