Concerns Over Centralization in Web 3.0

Experts in the industry are expressing worries about the potential for increased centralization in the upcoming Bitcoin (BTC) halving.

The fear is that the decrease in block rewards could render older mining equipment unprofitable, leading to a concentration of hashing power in the hands of a smaller number of miners. This trend towards centralization has been evident in the Bitcoin network in recent years and is expected to worsen after the halving.

Historical data from btc.com reveals that between 2016 and 2021, the top two mining pools controlled approximately 30-40% of the total hash rate during any given three-day period.

In more recent times, however, there has been a greater centralization of hashing power. As of February 28th, 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 the inception of Bitcoin, 26.55% of all blocks have been mined by unknown or unaffiliated sources. F2Pool, one of the major mining pools, has mined 10.11% of all blocks, while AntPool has mined 10.02%.

Over the past three years, there has been a significant increase in centralization, with Foundry USA mining 21.55% of all blocks, AntPool mining 18.78%, and F2Pool mining 14.25%.

In the last three months alone, centralization has continued to rise, with Foundry USA mining 30.32% of all blocks, AntPool mining 26.03%, ViaBTC mining 12.52%, and F2Pool mining 11.94%.

The issue of centralized mining in the context of web 3.0

Jesper Johansen, the founder and CEO of Northstake, a venture capital firm, is among those who foresee heightened volatility in BTC mining, leading to increased centralization.

In an interview with Cointelegraph, Johansen stated: “The upcoming halving will result in fluctuations in hash rate, as miners with higher operating costs and outdated setups will shut down. This will further concentrate the hash rate, with large mining pools operating at significantly lower marginal costs per hash rate, intensifying concerns about centralization.”

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Johansen highlights two main areas where challenges may arise, undermining the decentralized nature of Bitcoin:

“Second, centralized mining pools could wield disproportionate power in decisions regarding protocol updates or changes, potentially skewing development in favor of their own interests rather than the broader community,” he added.

Bitcoin researcher Chris Blerc has long been raising concerns about centralization. According to Blerc, centralized mining poses various risks for BTC, including the potential blacklisting of certain services, such as coin-joining.

In December 2023, Blerc took to social media platform X to point out that the top two mining pools controlled 55% of the hashing power. These two pools, AntPool and Foundry USA, are both compliant with regulations and require all miners to comply with Know Your Customer requirements, effectively giving control to U.S. regulators.

“We could be just one move away from major problems for Bitcoin. But what’s even worse is that no one seems to be addressing this issue. Where’s the urgency?” asked Blerc.

The Debate Over Centralization and Censorship in Bitcoin

The question of whether centralization in Bitcoin will lead to censorship may be irrelevant, as previous research has uncovered evidence of a mining pool filtering certain transactions.

In November 2023, Bitcoin developer 0xB10C discovered that some blocks may have omitted transactions involving addresses sanctioned by the United States Office of Foreign Assets Control (OFAC).

Out of six potential blocks, 0xB10C identified four that were likely to have filtered out OFAC-sanctioned addresses.

Interestingly, all four of these transactions were ignored by the F2Pool mining block. 0xB10C concluded, “These missing sanctioned transactions suggest that F2Pool is currently filtering transactions.”

F2Pool later confirmed that it had indeed filtered transactions, but after facing backlash from the community, they announced that they would reverse their decision “for the time being.”

It’s important to note that even if one mining pool filters a transaction, it can still be processed, but it may experience delays. The more mining pools that filter it, the longer the delay may be.

Pursuing Profitability in a Decentralized Web 3.0

With the halving of block rewards potentially making mining less profitable, miners may face challenges in maintaining their income. However, there are potential solutions to offset this reduction in profits and still make money in a decentralized Web 3.0 environment.

According to Acheron Trading CEO Laurent Benayoun, miners have multiple avenues for generating profits. These include newly minted BTC and transaction fees, which are determined through an auction mechanism for processing priority.

While the halving may lead to decreased profitability and centralization, the recent increase in network fees due to the Ordinals innovation could prove beneficial. This could potentially compensate for the decrease in mining rewards and even surpass it in some cases.

Furthermore, the slowing of supply inflation in Web 3.0 could also provide additional compensation for miners in terms of dollar value. This could further counteract the effects of the halving and make up for any potential shortfall.

Addressing the issue of centralization in web 3.0

There are numerous challenges to consider when dealing with the problem of centralization in web 3.0. As the value of Bitcoin and its transactions continue to rise, finding solutions to this issue may become increasingly difficult.

Recent developments have shown that energy-efficient miners in the US may be less affected by the upcoming Bitcoin halving event.

According to Johansen, any proposed solutions to mitigate centralization would face significant opposition from the Bitcoin community.

These solutions could involve altering the mining algorithm or adjusting rewards to promote decentralization. However, gaining widespread consensus for such changes is challenging, especially among Bitcoin maximalists who are resistant to protocol changes.

In the end, even if the halving causes some setbacks for miners, the only viable option will be to persevere and adapt.

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