A Brief History of Bitcoin Mining (and Why it’s Getting More Decentralized)

Written by BTSE

January 30, 2020

A Brief History of Bitcoin Mining (and Why it’s Getting More Decentralized)

Mining is one of the most dynamic aspects of the Bitcoin network, and one which has evolved and expanded remarkably over the years. What started as a Proof of Work-powered “one CPU one vote” system in Satoshi Nakamoto’s whitepaper from 2009 has developed to become an activity for specialized hardware (ASICs) where thousands of actors join their forces together in mining pools in order to compete for the mining rewards.

Satoshi himself never predicted the rise of ASICs (Application-Specific Integrated Circuit) and the industrialization of Bitcoin mining, and the phenomena that happened over the years are consequences of a burgeoning free market where innovation seeks efficiency.

Instead of having every person who runs the Bitcoin client participate in the mining process, dedicated computers have been created in order to get the job done with better results. Thanks to this dynamic, the network security of Bitcoin has increased exponentially, at the cost of reducing mining decentralization by making it harder for home computers to solve increasingly difficult mathematical problems.

Interestingly, for the sake of reducing costs and maximizing efficiency, Bitcoin miners have sought and found the most affordable and green ways of producing electric energy. From the water wheels of the Sichuan region of China to the gas wells from Alberta, Canada, Bitcoin has spearheaded innovation and adoption of sustainable ways of producing electricity.


From CPUs to GPUs to Mining Pools and ASICs

Bitcoin hasn’t really been mined with CPUs since the days when Laszlo Hanyecz (best known for purchasing two pizzas for 10000 BTC in 2010) found a way to get the job done more efficiently with video cards. By November 2010, Satoshi Nakamoto himself became aware of the transition towards ASICs and “cooperative mining”, and he took his time to write a few suggestions to improve Slush Pool (the first mining pool in Bitcoin history).

Therefore, the “one CPU one vote” system was short-lived and didn’t work as planned. And since the early years, home mining didn’t really stand a chance against larger pools that put their hashing power together in order to increase their chances of solving math problems and getting the BTC. This had two major consequences: mining clients have been separated from full node clients in order to preserve the enforcement of consensus rules, and network protection has increased exponentially at the expense of creating more miner centralization.

The biggest risk of having too much concentration of hash power in the hands of a monopolistic pool or friendly oligopolistic miners is that they can launch a 51% attack on the network in order to double-spend existing transactions. This never happened thanks to three essential reasons:

  1. The open and permissionless nature of Proof of Work mining allows anyone to participate in block discovery;
  2. The Nakamoto consensus, which adjusts the difficulty and therefore creates opportunities for new miners to join in at various moments when other miners no longer run profitable operations;
  3. The increasing interest in Bitcoin and the subsequent effects on adoption and participation.

Even giants like Bitmain, which seemed so menacing in 2017 and 2018 that some speculated it was mighty enough to launch a 51% attack on BTC, have lost their status after certain management decisions and a lack of innovation in the ASIC sector. Eventually, the Chinese giant that once had the same revenues as Nvidia had to scale down operations and leave room for even more decentralization.

At their peak, Antpool and BTC.com (both of which are controlled by Bitmain) had a combined hash rate of 42%, causing a lot of concern. Today, no pool owns more than 18.5% of the hash rate – and both of Bitmain’s operations only amount to 23.9%. This is a testament to Bitcoin’s incentives system and ongoing decentralization.


Why Mining Pools Are not Homogenous Companies with a Universal Vision

When Bitcoin skeptics and critics analyze data about mining pools and hash rate distribution, they assume that a degree of centralization exists and something terrible can happen if several actors join forces to act in bad faith. This assumption isn’t just relying on the “Some people just want to watch the world burn” scenario where no participant is driven by the best economic choice but is also factually wrong.

Mining pools aren’t centralized companies that exert a general will or purpose. They are more akin to opt-in organizations that individual miners join in order to maximize their chances of discovering new blocks. SlushPool, the oldest mining pool, doesn’t own all the operations taking place under its umbrella – and neither does any other entity involved in Bitcoin mining.

Miners join a pool because it provides convenience and it brings the best financial results. However, adherence isn’t permanent and individual hardware owners can simply switch to another pool whenever their expectations are no longer met. Someone who contributes with hash power to F2Pool today might join BitFury in a few months because the fees are lower and more convenient – and this is just one of the examples.

If the creators of a particular mining pool have monopolistic intentions, it doesn’t mean that all the participants in their pool agree with them and will stick around for 51% of attacks that damage their predictable revenue. The market is very dynamic and there is always another pool that may offer better fees, more convenience, better profitability, and even more ideological convergence.

Furthermore, with proposals like Matt Corallo’s BetterHash which is being deployed by Blockstream in its hosted mining operations, pool mining will only become more decentralized through further individual miner empowerment.


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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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