Experts in the industry are expressing concerns over the upcoming Bitcoin halving, as they believe it could lead to increased centralization. The fear is that the reduction in block rewards will render older mining equipment unprofitable, concentrating hashing power in the hands of fewer miners. While the trend towards mining pool centralization on the Bitcoin network has been evident in recent years, the halving is expected to worsen the issue and accelerate the trend.
Historical data from btc.com reveals that between 2016 and 2021, the top two mining pools controlled around 30-40% of the hash rate during any given three-day period. However, hashing power has become even more centralized recently. On February 28, the top two mining pools, Foundry USA and AntPool, controlled almost 50% of the network’s hashing power, according to Coin Dance.
Data from mempool.space shows that since Bitcoin’s inception, 26.55% of the total blocks have been mined by unknown or unaffiliated sources. Mining pools, such as F2Pool, have mined 10.11% of all blocks, while AntPool has mined 10.02%. However, in the past three years, mining pool Foundry USA has mined 21.55% of all blocks, AntPool has mined 18.78%, and F2Pool has mined 14.25%. In the last three months, centralization has increased, with Foundry USA mining 30.32%, AntPool mining 26.03%, ViaBTC mining 12.52%, and F2Pool mining 11.94%.
The problem of centralized mining is a concern for industry experts. Jesper Johansen, founder and CEO of venture capital firm Northstake, predicts increased volatility in BTC mining, leading to increased centralization. Johansen explains that the halving will result in hash rate volatility as miners with higher operating costs and outdated setups go offline. This will further centralize the hash rate, as large-scale mining pools operate with significantly lower marginal costs. This intensifies concerns about centralization.
Bitcoin researcher Chris Blerc has also been warning about centralization. Blerc argues that centralized mining poses various risks for BTC, including the potential blacklisting of certain products, such as coin-joining services. In December 2023, Blerc highlighted that the two major mining pools controlled 55% of the hashing power. Both AntPool and Foundry USA are regulatory compliant and require miners to fulfill Know Your Customer obligations, potentially giving control to U.S. regulators.
The issue of centralization and its potential for censorship may not be a moot point. Existing research has already discovered one mining pool filtering or censoring certain transactions. In November 2023, Bitcoin developer 0xB10C reported on several transactions that may have been filtered out by mining pools. These suspect blocks contained addresses sanctioned by the United States Office of Foreign Assets Control (OFAC). From six candidate blocks, 0xB10C identified four blocks that were believed to have omitted OFAC-sanctioned addresses. All four transactions were ignored by the F2Pool mining block, leading to the conclusion that F2Pool was filtering transactions. After community pushback, F2Pool reversed its decision.
While the halving may reduce mining profitability, there are potential avenues for pursuing increased returns. If the price of Bitcoin doubles against the U.S. dollar, it could offset the reduction in income. Additionally, miners have multiple ways to make a profit, including newly minted BTC and fees offered by users of the network. The halving could shrink miners’ profitability, but the recent increase in network fees resulting from the Ordinals innovation could compensate for the decrease in mining rewards.
Dealing with centralization is a complex issue, and any drastic proposals to mitigate it would face opposition from Bitcoiners. Modifying the mining algorithm or adjusting rewards to favor decentralization would require widespread community consensus, which is difficult to achieve given the reluctance to protocol changes among Bitcoin maximalists. Ultimately, miners will have to ride out the challenges posed by the halving and find ways to adapt.