Bitcoin Mining Decentralization: Navigating Challenges and Innovations

Bitcoin Mining Decentralization: Navigating Challenges and Innovations

Bitcoin mining decentralization is coming. However, it’s a fact that Bitcoin mining currently trends towards centralization. The network’s immune system is working overtime to reverse the trend, though. It’s a colossal and crucial problem, and no one takes it lightly. Nevertheless, it’s solvable. It can and will be done, but it will not be easy or fast. 

Let’s analyze the problem and the solutions to establish where we are. 

Mining Decentralization: These Are the Problems

Once upon a time, China controlled 60% of the world’s hashrate. Luckily, their government prohibited the activity in 2021 and solved that problem in one full swoop. Nowadays, the US controls 37%, China 20%, Kazakhstan 13%, and Russia 11%. So, the hashrate is not evenly distributed, but at least the danger of centralization dissipated slightly, but we need to do more.

Besides the geographical problem, centralization is out of control on these fronts:

1.- Chinese companies control the ASICs market with an iron fist.
2.- Asia controls the chip manufacturing market.
3.- Mining pools control block creation to an absurd degree.
4.- Big mining institutions have the edge over home miners.
5.- Institutional adoption is creeping in and multinational investment companies have a huge stake in publicly traded mining companies.

How does the Bitcoin network decentralize all that? Slowly and methodically.

Let’s go through each point with a fine brush to understand the problems we face. 

China And the ASICs Market 

Two companies, BitMain and MicroBT, control 90% of the ASIC market. That level of centralization is unacceptable, but it’s our current reality. 

ASIC stands for application-specific integrated circuit, and from 2013 on ASIC mining rigs took over the hashrate generation market. It was a blessing and a curse. On the one hand, with these powerful machines, the security of the Bitcoin network increased tenfold. On the other, the mining centralization threat grew another tentacle. Before, people mined with CPUs and graphic cards, and those are widely available.

It’s as Proto, the mining arm of Jack Dorsey’s Block, puts it:

The bitcoin mining industry is currently dominated by one company that has overwhelming market share, and a couple other players – all of whom operate from a single country. These companies have historically consolidated market share based on their in-house ASIC design expertise, without any real challenge from truly customer-focused companies. This concentration of power has led to limited consumer choice, high barriers to entry, and significant pain points for mining operators.

The new and improved application-specific machines created an industry, and at the moment that industry is China-based.

Asia And the Chips Market

For a long while, the Taiwan Semiconductor Manufacturing Company, better known as TSMC, controlled the chip market. Both Bitmain and MicroBT used their semiconductors/ chips. However, in 2021, the giant Samsung began manufacturing chips in South Korea. Nowadays, MicroBT is their main Bitcoin-related client.

Most, if not all, semiconductors/chips used in Bitcoin mining come from these two companies’ foundries. 

Besides them, there are two other possible sources:

1.- GlobalFoundries, with factories in Singapore, Germany, and the US. Little contact with the Bitcoin world.

2.- Semiconductor Manufacturing International Corporation, better known as SMIC, in China. They’re tenuously tied to Canaan Creative, the distant third ASIC Bitcoin miner’s manufacturer. However, they’re reportedly developing “a mining machine for an undisclosed cryptocurrency with a relatively small market cap, rather than bitcoin due to current technical limitations.” So, little contact with the Bitcoin world also.

In any case, the conclusion is the same: Asia monopolizes the semiconductor/ chips market related to Bitcoin mining, and again, two companies are at the center of it all. This calls for urgent decentralization, however… 

Solution: How Proto Will Help with Mining Decentralization

The chip problem is a hard nut to crack. The giant Intel devoted all kinds of resources and expertise to open a chip factory in the USA, just to close the Blockscale program without fanfare a short year later. Also, in June 2023, Riot and MicroBT announced plans to join forces to produce Bitcoin miners in the USA, but one of their latest press releases just says:

 “MicroBT has recently commenced its United States-based manufacturing operations of Bitcoin mining hardware.

And then, there’s Jack Dorsey’s Proto. “Proto’s mission is to decentralize bitcoin mining and increase access to tools for builders, regardless of their size or location. We believe this is the best way to create a stronger, more resilient network.” The program has been active for years, changing names and objectives as it goes along, but it seems to have found its stride lately.

In Proto’s introductory post, the company promised:

We are committed to long-term ASIC chip development, which will be the core of all of our product offerings. These chips will power our own hardware systems and be available as standalone products for other mining hardware manufacturers to allow for decentralization of hardware solutions on the market.

Their mission sounds promising, and in another press release they explained what we can expect in the future:

Our ASIC program will democratize mining by enabling third parties to use our chips to develop custom hardware solutions tailored to their specific needs, whether on their own or in partnership with us, significantly expanding the bitcoin mining ecosystem. This strategy underscores our long-term commitment to the industry.

That sounds promising for OSMU, the Bitaxe, and all the projects Solo Satoshi supports and commercializes. More on that later.

This Is How Mining Pools Control Block Creation

Solo mining is a high-risk/ high-reward game. Probabilistically speaking, a solo miner could spend a lifetime without hitting a block. On the other hand, that solo miner could earn the whole block reward if it mines a block. Nowadays, most miners, from industrial operators to home miners, prefer security. They join a mining pool, split the rewards with other members, and get a steady income. That’s a centralizing force like no other.

Bitcoin mining decentralization

Four mining pools control around 70% of the hashrate, and Hashrate Index only accounts for 18 mining pools in total. Most if not all of them are in China and the US. And, if you believe the rumors, several of them are shell mining pools for Bitman’s AntPool. Theoretically, miners have the freedom to point their hashrate to whichever mining pool they want, but in reality, their options are severely limited. 

The problem complicates tenfold when you realize that mining pools are the ones building the winning blocks.

Bitcoin mining decentralization

At the moment, mining pools effectively control which transactions the Bitcoin network verifies, and which stay on the mempool forever. That’s unacceptable and prone to censorship. That’s centralization on top of centralization. That’s… inevitable?

Not quite. The Bitcoin network doesn’t sleep, so, two possible solutions are in an advanced state.

Solution: DATUM And StratumV2

Mining decentralization is paramount. The problem is so important that Solo Satoshi already published an in-depth article about the two protocols that aim to solve it. Both DATUM and StratumV2 give the power back to the miners by allowing them to create blocks. With that small but significant change, the block-creating entities go from a centralized 18 to thousands spread all over the world.

Read our article on DATUM and StratumV2 for details on this part of the mining decentralization process.

Big Miners Edging Out Small Ones

The industrialization of bitcoin mining is another centralizing factor the network has to deal with. On the one hand, it brings hashrate all-time highs, stability, and respectability from the entrepreneurial class. On the other, each warehouse full of ASICs working 24/ 7 is an easy target. If governments ever try to bomb Bitcoin into submission, they know where to strike.

Home miners and small operations are, on the other hand, a decentralizing factor. How can they compete with ever-bigger mining farms and the venture capitalists that fund them? Especially considering publicly traded mining companies are striking deals with energy companies to acquire the cheapest power available. 

Home mining is essential to the survival of the Bitcoin network, but for a long time, industrialization discouraged the practice. As Solo Satoshi’s Hashpunk’s Manifesto puts it, “as time progressed, specialized hardware, enormous mining farms, and centralized corporate entities emerged, concentrating the power that was supposed to be dispersed among us all.

As it usually happens, the Bitcoin network is fighting back. Enter The Open-Source Mining Revolution.

Solution: OSMU And Bitaxe

OSMU exists since March 2023 and claims to be “the origin of every big open-source mining project.” We’re talking about the Bitaxe, the Nerdminer, and the NerdQAxe+ among others. The organization is “interested in the finer details of Bitcoin mining hardware, firmware and software. We reject industry gatekeeping and secrecy and strive to share what we have learned.

So far, the main project is also Solo Satoshi’s best-seller: the Bitaxe, “a fully open-source bitcoin miner.” The developers are on the 5th major revision of the product, the Bitaxe Gamma, and Solo Satoshi’s description says it all:

The Bitaxe 601 Gamma takes everything you loved about its predecessors and kicks it up a notch. With its single state-of-the-art BM1370 ASIC chip, this miner delivers an astounding hash rate of 1.2 TH/s at default settings, putting serious mining power in the palm of your hand.

The theory is simple, a Bitaxe is not nearly as powerful as a huge ASIC machine and most home miners will have one or two instead of an industrial farm. Since the hashrate is low, it doesn’t make economic sense to join a Bitcoin mining pool (although a Bitaxe miner certainly could) and solo mining is the most sensible option. 

Also known as lottery mining, the rationale behind the practice is this: there’s a high probability that your miner will never hit a block, but if it does, the 3.125 BTC (plus mining fees) reward is all yours.

And there’s an even more important reason to do it, to join the fight, to do what’s right.

Solo Mining Means Decentralization

Industrial miners have to make money and owe responsibility to their shareholders, solo miners have another mission in mind. They want to maintain the Bitcoin network up and running and decentralized forever. Industrial miners could never compete with this passion.

For a call to arms, let’s return to Solo Satoshi’s Hashpunk’s Manifesto:

We must encourage each other to participate in solo mining, share innovations in hardware and software, and defend the Bitcoin network together. We must do this not only to rebel against centralized interests, but to keep Bitcoin the pathway to freedom it was always meant to be. Our movement gathers strength every time a single solo miner commits their piece of hashrate to the network, forging another link in the chain of financial freedom.

The game is afoot, and home mining is here to stay.

Institutional Adoption Means Centralization

There are endless articles about the different Bitcoin spot ETFs and MicroStrategy’s extreme Bitcoin accumulation… strategy. Every bitcoiner knows that Wall Street is already here, and smart businesses are adding Bitcoin to their balance sheet. However, a centralizing factor that usually flies under the radar is the relationship between investment firms and publicly traded bitcoin mining companies.

For example, BlackRock owns a large chunk of four out of the five biggest mining companies: Riot, Marathon, Cipher, and Terawulf. That level of centralization might seem scary, especially considering there’s not much Bitcoiners can do about it… although…

The solution to this complex problem is simple: solo mining. Refer to the Hashpunk’s Manifesto for precise instructions. It’s as The Doors said, “They got the guns/ But we got the numbers/ Gonna win, yeah, we’re taking over…

Promising Developments: Block’s MDK

The plebs’ response to mining centralization is OSMU, the Bitaxe, the Nerdminer, and future mind-blowing inventions. However, Bitcoiners also have a powerful ally in Jack Dorsey’s Block. Another mining product of theirs, the MDK or Mining Development Kit, is already in beta, and prototypes were shipped to various testers. These are its characteristics:

Each MDK unit will consist of three hashboards equipped with 100 5-nm BZM2 ASIC chips and a controller board loaded with our custom firmware. The system is expected to produce hash rates up to 110T, with energy efficiency ranging from 27-33J/T. It will also include an API for seamless integration with various existing miner management software solutions.Bitcoin mining decentralization

The MDK is “compatible with commonly available market options such as chassis, PSU, fans, and cables.” The prototypes that the tester received use third-party chips, but “our eventual production mining system will use our internally developed three-nanometer (3-nm) mining chip.” This chip already exists and is part of Proto’s ASICs program. This company is moving fast.

Also, think about this: what will happen when the OSMU gets a hold of Proto’s chips, software, and hardware? As fuel, they will turbo-charge the open-source mining movement.

Conclusion: Mining Decentralization Is Coming

There’s no shortage of problems, centralizing factors, and major forces working against us. However, the Bitcoin network’s immune system is countering each and every attack from various angles. From DATUM and StratumV2, to OSMU and the Bitaxe, to new mining operations in Africa and Latin America, to Block, Proto, and the MDK. If one of those solutions doesn’t pan out, another one will take its place, because the Bitcoin network doesn’t stop. Tick Tock, next block.

It’s as The Doors said, “May take a week/ And it may take longer,” but mining decentralization is coming.

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