Decentralization means different things for different people. It can also be applied to a variety of different variables, from the technological to the cultural. How much of bitcoin’s cultural aesthetic is what keeps block size (within the network) or the number of bitcoins fixed? How much of decentralization is the technical balance between miners, nodes, and other stakeholders in the network that accords each different powers and responsibilities?

An increasingly common argument among those criticizing the decentralization of proof-of-work systems is the centralization brought by lower hardware and electricity costs and the high degree of mining hash rate concentrated in “Chinese” mining pools. This has, for example, been a long-standing thread that has been pushed by Ripple CEO Brad Garlinghouse, with the Ripple team also making allegations that both ethereum (in its current proof-of-work consensus algorithm) and bitcoin are controlled by China as a result of the mining pool concentration.

The first thing to understand about this argument is that mining pools command loyalty not based on geographic traits or even political ones, but rather, reward types, fees, and how the pool deals with bitcoin transaction fees.

Mining pools might have a geographic base, but miners that pledge their hardware and their hash rate might not and can switch their loyalty depending on a host of factors. It’s important then to look at the hash rate of a mining pool not as one monolithic bloc that can be controlled and manipulated at will, but rather as a marketplace or as an aggregator that commands a fickle amount of loyalty. At any given time, if the rewards and technical conditions of mining pools change, there can be a shift towards mining pools based in Europe or North America — or anywhere else in the world.

Mining pools based in China are also running contrary to state policy. The People’s Republic of China has a skeptical view towards bitcoin and other cryptocurrencies. This included concrete policy such as the central government asking local governments to step out of bitcoin mining.

Everything from energy usage to dissident activity has been cited as reasons to cut down power supplies to bitcoin miners. Several bitcoin miners have actually left the country as a result and looked to seek refuge in countries like Canada. In a sense, this is a more philosophical and general argument, but it speaks to how peoples are not tied exclusively to their states despite what those states would lead you to believe.

Chinese bitcoin mining pools and bitcoin miners are acting as a sort of dissent within the Chinese political system. While some local governments may support them, the central government in China has strongly embraced blockchain and its own central bank digital currency (DCEP) while shunning cryptocurrencies. Miners themselves are highly nomadic within China, with many shifting from different regions depending on the weather and its implications for electricity rates.

While their incentives may not be bereft of financial interest (and in fact, are probably principally motivated by money), to blame the mining pools for being based in a certain nation and being controlled or blindly loyal to a government flies in the face of the facts on the ground. Mining pools are more loyal to whichever incentives help them make more value. Miners in turn are loyal to whichever pool supports their stance on bitcoin and their best rewards.

Bitcoin miners derive value from bitcoin and other proof-of-work cryptocurrencies — if the health of these networks would decline, then the fixed investments they would have made in ASIC mining equipment would be worthless. Their interests are aligned to the bitcoin network and this plays a larger role in their decisions from what to do during a fork to where they put their hash rate.

Miners are also not the only institutions that matter in the balance of proof-of-work blockchains. Nodes are run around the world. The coders that build up the framework of cryptocurrencies are distributed around the world, with US-based institutions such as cryptocurrency exchanges and non-for-profits like the Human Rights Foundation providing funding.

There’s a careful checks and balance in any proof-of-work built from a cultural aesthetic towards decentralization that involves different stakeholders — no one group can shape the complete destiny of proof-of-work based cryptocurrencies like bitcoin.

Yet, the idea of geographical centralization is a concern, albeit one that has been exaggerated by those who want to paint bitcoin and ethereum in a certain light. It is factually correct to say that Chinese bitcoin mining pools control a large amount of the hash rate that powers bitcoin, for example. A study in 2019 estimated that there was about 65% of the hash rate within China itself. This was largely due to cheap hydroelectricity (especially in areas such as Sichuan), and close connections between hardware manufacturers based in China and mining pools/miners with the best claim to established relationships.

Yet with the establishment of stable capital markets around bitcoin mining (with certain companies having gone public), bitcoin mining has the potential to be more globally distributed and decentralized from geographical risk. As hardware supply chains and global power distribution come into question with warnings of “decoupling” economies, it’s entirely possible that this shift will help auger a more distributed bitcoin and cryptocurrency mining network, helping allay the threat of centralized geographies.

In a debate mirrored from geopolitics, the idea of “Made in China” vs. elsewhere has come to rest with globally distributed proof-of-work networks. Yet the analogues are not perfect because miners tend to be more loyal to the network rather than the state, more loyal to electricity prices and fees than anything else.

An effort to solve the geographic centralization problem in mining hardware is to be applauded and is well under way — and can be helped with stable regulations, capital markets, and lower electricity prices as well as changes in hardware supply chains from anywhere in the world.

(Excerpt) Read more Here | 2020-12-29 08:32:41
Image credit: source

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.