Bitcoin mining centralization goes against the very ethos of cryptocurrency.

When building Bitcoin, Satoshi Nakamoto envisioned a decentralized digital currency that could operate without the need for centralized institutions such as banks and governments.

Satoshi did not picture a situation where a few entities controlled a significant portion of the entire network, essentially centralizing power and influence.

Bitcoin mining centralization, a result of market competition over the years, goes against the fundamental principle of cryptocurrency.

What Is Bitcoin Mining Centralization?

Bitcoin mining centralization is the concentration of mining power among a few dominant players. Originally, anyone with a computer and internet connection could mine Bitcoin. However, the network grew with time, and as a result, mining became more competitive.

This led to the development of specialized chips known as ASICs (Application Specific Integrated Circuits), which outperformed GPUs and CPUs by being more efficient. Unfortunately, ASICs are expensive and out of reach for most people, and the fact that newer, better, but more costly versions are released exacerbates the situation.

Miners began to form pools to combine their computing power and share the rewards earned. The largest pools also acquire the latest technologies to stay ahead of the competition, which caused others who couldn't keep up to drop off.

Over time, a few large mining pools, including Foundry USA, Antpool, and F2Pool, have come to dominate the Bitcoin mining industry, controlling a significant percentage of the total hash rate at any given time. This beats the logic of cryptocurrency, which is supposed to distribute power among many players.

3 Causes of Bitcoin Mining Centralization

Several factors contribute to the centralization of Bitcoin mining. Most of these factors also apply in a typical competitive market. They include

1. Economies of scale: As mentioned earlier, Bitcoin mining is very competitive. Miners that solve complex hash puzzles and verify the most blocks stay profitable. And to do so, they need expensive specialized hardware such as ASICs. So they come together and form large mining operations to reduce costs and increase profitability.
2. Barriers to entry: Starting a Bitcoin mining company is very expensive. You'll need significant upfront capital for hardware. Yet that's not as big an issue as maintaining it since it consumes an enormous amount of electricity and can take years to turn a profit. With this in mind, it's no wonder prospective investors would opt to join established mining pools over smaller ones.
3. Legislation: In some jurisdictions, mining operations are subject to strict regulations, making it hard for people to participate. For instance, when China banned Bitcoin mining, trading, and transactions, all mining operations moved to other countries, more so to Northern America, which now accounts for almost 45% of the global hash rate.
4. Power costs: Bitcoin mining is a power-intensive operation, and the more power a mining operation has, the better chances it has to stay competitive. So crypto miners set up shop in areas where electricity is cheap. As such, you'll find mining pools forming in areas with cheap power supplies, leading to centralization.

3 Effects of Bitcoin Mining Centralization

While Bitcoin mining centralization is a natural process inspired by competition, it presents a few challenges to the network and ecosystem.

1. Decreased decentralization: The most notable effect of mining centralization is that it goes against the very reason it was built: to decentralize finance. Instead, a few entities get significant control over mining, which is akin to governments printing money. This leads to concerns about security and integrity in case the institutions become compromised.
2. Risk of 51% attacks: A 51% attack is an attack in which a group of miners that control over 50% of the mining hash rate perform self-beneficial actions. As mining becomes more centralized, the risk of such an attack increases. A good example is Bitcoin Gold's 2020 51% attack, which led to $70,000 worth of BTG being spent twice.
3. Control over blockchain protocol: Similarly to the increased risk of launching a 51 percent attack, the united entities with significant control of the mining power can dictate the development of the Bitcoin protocol and potentially change it to benefit their interests. However, if such a change is detected sooner by the wider Bitcoin community, it can be rejected.

All these challenges require careful consideration and action if the integrity and security of the Bitcoin ecosystem are to be preserved. But how?

How Can Crypto Mining Be Decentralized?

Over time, various parties have suggested ways to solve the centralization issue.

Bitcoin Core developer Matt Corrallo proposed the BetterHash Protocol, which involves decentralizing the selection of transactions going into a block to individual hardware operators. However, it didn't provide a mechanism that would ensure miners will choose transactions that create a balanced difficulty for the Bitcoin network hence opening another loophole for centralization. It also introduced inefficiencies due to the need to constantly monitor the network, which was hard to adopt.

Meanwhile, the crypto mining pool P2Pool suggested decentralizing payouts to address the issue. However, by decentralizing payouts, small miners who rely on consistent payouts to cover costs would be disadvantaged. Also, it required low-latency connections between miners and the P2Pool server, which meant whenever a miner experienced high latency, their mining performance would be negatively impacted. For these reasons, it didn't incentivize its adoption.

The most direct way to solve Bitcoin mining centralization is to decentralize the mining pools. This can be achieved through incentives that encourage the use of smaller and more decentralized mining pools. A practical incentive would be to fund innovation and experimentation by small miners, leading to better and more competitive mining strategies.

Notably, former Twitter CEO Jack Dorsey's payment company, Block, started working on an open Bitcoin mining system to make the network more decentralized and permissionless. Block aimed to build its own high-performance open-source ASIC and a Bitcoin wallet to make Bitcoin custody more mainstream.

Nevertheless, incentives alone may not be enough to encourage decentralization. Regulatory policies, network upgrades, and community initiatives may also be necessary to encourage the growth of smaller and more decentralized mining pools.

Will Bitcoin Mining Be Decentralized?

It's difficult to predict that Bitcoin mining will become more decentralized. Mining power will remain centralized among dominant players as mining becomes more expensive.

Due to economies of scale and other bottlenecks, smaller miners continue to struggle against the big dogs. As a result, it would take tremendous efforts by the rest of the Bitcoin network to implement strategies and solutions to solve Bitcoin mining centralization.