"Sufficiently Decentralized"

Mining Pools 5/17/24

In June 2018 William Hinman, the Director of the SEC's Division of Corporate Finance, gave a speech to the Yahoo Finance All Markets Summit: Crypto entitled Digital Asset Transactions: When Howey Met Gary (Plastic) in which he said:

when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception.
...
Over time, there may be other sufficiently decentralized networks and systems

Below the fold, thanks to a tip from Molly White, I look at recent research suggesting that there is in fact a "central third party" coordinating the enterprise of Bitcoin mining.

I have been pointing out that the crypto-bros claims of decentralization are false for more than a decade, most recently in Decentralized Systems Aren't. In that talk I quoted Vitalik Buterin from 2017 in The Meaning of Decentralization:

In the case of blockchain protocols, the mathematical and economic reasoning behind the safety of the consensus often relies crucially on the uncoordinated choice model, or the assumption that the game consists of many small actors that make decisions independently. If any one actor gets more than 1/3 of the mining power in a proof of work system, they can gain outsized profits by selfish-mining. However, can we really say that the uncoordinated choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?

Blackburn et al Fig. 5c

Coordination among Bitcoin miners has a long history. In 2022 Alyssa Blackburn et al's Cooperation among an anonymous group protected Bitcoin during failures of decentralization showed that Bitcoin's centralization problem dated back to its earliest days. They were able to:

estimate the effective population size of the decentralized bitcoin network by counting the frequency of streaks in which all blocks are mined by one agent (bottom-left) or two agents (bottom-right). These are compared to the expected values for idealized networks comprising P agents with identical resources. The comparisons suggest an effective population size of roughly 5, a tiny fraction of the total number of participants.

Bitcoin started in 2009 with one miner (Nakamoto) and two years later it was dominated by five miners. It has been dominated by 5 or fewer mining pools ever since.

In 2014's Economies of Scale in Peer-to-Peer Networks I wrote:

When new, more efficient technology is introduced, thus reducing the cost per unit contribution to a P2P network, it does not become instantly available to all participants. As manufacturing ramps up, the limited supply preferentially goes to the manufacturers best customers, who would be the largest contributors to the P2P network. By the time supply has increased so that smaller contributors can enjoy the lower cost per unit contribution, the most valuable part of the technology's useful life is over.

In December 2021 Alex de Vries and Christian Stoll estimated that:

The average time to become unprofitable sums up to less than 1.29 years.

It has been obvious since mining ASICs first hit the market that, apart from access to cheap or free electricity, there were two keys to profitable mining:

1. Having close enough ties to Bitmain to get the latest chips early in their 18-month economic life.
2. Having the scale to buy Bitmain chips in the large quantities that get you early access.

And it wasn't just Buterin that noticed that the big mining pools were "well-coordinated". In 2021's Blockchain Analysis of the Bitcoin Market Igor Makarov & Antoinette Schoar wrote:

Six out of the largest mining pools are registered in China and have strong ties to Bitmain Techonologies, which is the largest producer of Bitcoin mining hardware.

Protos provides much better evidence of just how "well-coordinated" the big pools are in New research suggests Bitcoin mining centralized around Bitmain:

A sleuth found a clue in Antpool’s block template: A manually prioritized transaction immediately after the 6.25 BTC block reward or ‘coinbase’ transaction. This new research by pseudonymous Bitcoin developer 0xb10c seemingly confirms long-rumored practices by Antpool hiding its massive operation under the names of ostensibly independent pools.

In short, it warns that despite tens of thousands of decentralized nodes, Bitcoin might actually be quite centralized from a mining perspective.

There are two sleuths involved, discovering two kinds of evidence. First:

0xb10c detected that BTC.com Pool, Binance Pool, Poolin, EMCD, and Rawpool show signs of using Antpool’s method for prioritizing the post-coinbase transaction.

Antpool might also use a sixth pool, Braiins, but 0xb10c was still analyzing its merkle branches as of the research publication time. Nearly identical merkle branches might indicate that these five or six pools often use the exact same template as Antpool for selecting transactions to include in a block.

In other words, all of these pools often use Bitmain’s machines, often assemble transactions according to Bitmain’s block template, often prioritize the same manually-configured post-coinbase transaction as Bitmain, and often send coinbase and transaction fees to the same custodian as Bitmain.

Second, mononaut discovered:

A single custodian now controls the coinbase addresses of at least 9 pools, representing 47% of total hashrate.

Specifically:

Mononaut traced coinbase rewards from mining pools AntPool, F2Pool, Binance Pool, Braiins, BTCcom, SECPOOL, Poolin, ULTIMUSPOOL and 1THash, and Luxor. He found suspicious levels of cooperation from these supposedly competitive entities in allocating coinbase rewards to a shared — possibly Antpool-controlled — custodian.

0xb10c couldn’t confirm that SECPOOL and SigmaPool entirely cloned AntPool’s template, although they seemed to share a similar template. In all, it seems unlikely that up to nine major bitcoin mining pools use a shared custodian for coinbase rewards unless a single entity is behind all of their operations.

Thus it appears that, instead of being controlled by 3 large mining pools, Bitcoin's blockchain is actually contolled by a single huge mining pool operating through a set of subsiduaries. And that this pool is controlled by Bitmain.

From Bitmain's point of view, this makes a lot of sense. They have essentially one product, mining rigs. Controlling the mechanism through which the bulk of their customer base is "well-coordinated" would be a big help in generating consistent excess profit.

Source

The image is blockchain.info's 4-day mining history. Extracting the pools mentioned in the research we have this table:

Blocks Mined 5/13-17 by suspects
Pool	Percent	Number	$K
AntPool	24.868%	141	9,447
F2Pool	8.642%	49	3,283
Binance Pool	3.880%	22	1,474
Braiins Pool	2.293%	13	871
BTC.com	1.058%	6	402
Total	40.744%	231	15,477

In 4 days there should be 576 blocks. 40.744% of 576 is 235 blocks, so close enough. There are some pools mentioned that don't appear in the history (SECPOOL, ULTIMUSPOOL, 1THash, EMCD, Luxor). Equally, there may be "well-coordinated" pools missing from the research. So Bitmain does appear to control significantly more power than the biggest single pool. Foundry USA controls 31.746%, and together with Bitmain's collaborators controls 72.49% of the hashing power. The Bitmain pools are mining almost $4M/day at today's "price".

But we should not worry that the Bitcoin blockchain is even less decentralized than it has been all along. It is in safe hands. Bitmain isn't going to kill the goose that lays the golden eggs.

Source

It is only fair to point out that the Ethereum community has actually improved decentralization slightly. A year ago the top 5 staking pools controlled 58.4%, now they control 44.7% of the stakes. But it is still true that block production is heavily centralized, with one producer claiming 57.9% of the rewards.

No-one really cares that cryptocurrencies are actually centralized; they care that they are seen as decentralized. In Deconstructing ‘Decentralization’: Exploring the Core Claim of Crypto Systems Prof. Angela Walch explains why this appearance is important:

the common meaning of ‘decentralized’ as applied to blockchain systems functions as a veil that covers over and prevents many from seeing the actions of key actors within the system. Hence, Hinman’s (and others’) inability to see the small groups of people who wield concentrated power in operating the blockchain protocol. In essence, if it’s decentralized, well, no particular people are doing things of consequence.

Going further, if one believes that no particular people are doing things of consequence, and power is diffuse, then there is effectively no human agency within the system to hold accountable for anything.

In other words, it is a means for the system's insiders to evade responsibility for their actions.

In Decentralized Systems Aren't I pointed out that:

The fact that the coins ranked 3, 6 and 7 by "market cap" don't even claim to be decentralized shows that decentralization is irrelevant to cryptocurrency users. Numbers 3 and 7 are stablecoins with a combined "market cap" of $134B. The largest stablecoin that claims to be decentralized is DAI, ranked at 24 with a "market cap" of $5B.

I rest my case.