{"id":24703,"date":"2024-04-26T19:04:51","date_gmt":"2024-04-26T19:04:51","guid":{"rendered":"https:\/\/bitcoins-101.com\/2024\/04\/26\/shadow-boxing-comments-on-proof-of-work-centralization-hysteria\/"},"modified":"2024-04-26T19:04:51","modified_gmt":"2024-04-26T19:04:51","slug":"shadow-boxing-comments-on-proof-of-work-centralization-hysteria","status":"publish","type":"post","link":"https:\/\/bitcoins-101.com\/2024\/04\/26\/shadow-boxing-comments-on-proof-of-work-centralization-hysteria\/","title":{"rendered":"Shadow Boxing: Comments On Proof-Of-Work Centralization Hysteria"},"content":{"rendered":"

The always-relevant Marty Bent<\/a> had Spiral<\/a> developer Matt Corallo<\/a> on his podcast<\/a> this week to address the freaks about urgent Bitcoin mining matters.<\/p>\n

To bring everyone up to speed, the concerns stem from recent sleuthing of the blockchain which revealed that some pools have been getting perhaps a little too cozy. <\/p>\n

How do we know this? Well, everyone\u2019s favorite snoop mononaut recently pointed out<\/a> that an unusual percentage of Bitcoin\u2019s mining reward was being consolidated under the control of a single custodian. <\/p>\n

How bad is it? Well about 47% of the hashrate<\/a>, on a good day. Yeah, pretty bad. <\/p>\n

Now why in Satoshi\u2019s name would they do such a thing, you ask?<\/p>\n

C.R.E.A.M.<\/h2>\n

To begin with, have you looked at the hashrate chart lately anon? You practically can\u2019t tell it apart from the US debt hockey stick. Backed by hardware advancement, public balance sheets, and increasing forays into cheap energy sources, Bitcoin mining has become an arms race. Since the Chinese mining ban of 2021, the network\u2019s hashrate has more than quintupled. <\/p>\n

The effects this has had on miners\u2019 margins are self-explanatory. Everyone is squeezing each other out. The recent bear market saw a bunch of consolidation, particularly on the Western front. At the pool level, Foundry has been the biggest benefactor with nearly 25% of the current hashrate, down from 35% last year. <\/p>\n

The reason they attained such dominance so quickly is something Bitcoiners are well acquainted with: volatility. In this case, it\u2019s more often referred to as variance. Others simply call it luck. <\/p>\n

Luck, under the conditions described above, can make or break your business. It\u2019s the reason pools exist in the first place. Proof-of-work is a random process and randomness is the bane of cash flow. By combining your hashrate with others, you improve your odds and, perhaps, manage a more reliable revenue stream.<\/p>\n

This is important because when your bills come due every month, your utility provider doesn\u2019t care about your misfortunes. The tighter the margins, the more vulnerable you are. In today\u2019s competitive environment, it\u2019s a matter of survival. <\/p>\n

What does any of this have to do with Foundry? <\/p>\n

Well, it turns out another way to smooth over miners\u2019 income is to adjust your pool\u2019s payout scheme and completely remove variance from the equation. How? Simply pay them for their work regardless of how often you might mine a block. A process referred to as FPPS (Full Pay Per Share)<\/a>.<\/p>\n

If that sounds expensive to you that\u2019s because it is. The pool effectively has to front every payment out of pocket and hope they can pay themselves back with the blocks they eventually mine. If you hit a bad streak and your balance sheet isn\u2019t strong enough to absorb the lack of revenue, you\u2019re Sam Bankman Fried.<\/p>\n

Enter Foundry. Through a combination of uncanny timing, business savvy, and a DCG-sized war chest, they\u2019ve created a financial moat around their pool operations that makes it very hard for smaller players to come in and compete. <\/p>\n

Of course, it\u2019s slightly more complex in practice, but that\u2019s pretty much the gist of it. <\/p>\n

Back to our little posse of pools and the mysterious custodian. Have you figured it out yet? <\/p>\n

The same game is playing out on the other side of the pond. It\u2019s very likely that the emergence of Foundry as a major player exacerbated the dynamics laid out above and forced smaller pools to capitulate. <\/p>\n

The execution appears to be slightly different but it\u2019s essentially the same model. We can validate that several pools now share the exact same block templates. This matches with reports that Antpool is offering white-labeling services. <\/p>\n

That\u2019s right \u2014 proxy mining is, apparently, a business model. <\/p>\n

On top of this, the aggregation of coinbase outputs suggests that an even larger percentage of the hashrate seems to be financing their operations through the same provider. <\/p>\n

To put it another way: a single entity writes the checks for almost half of the network\u2019s hashrate.<\/p>\n

Dollar dollar bill, y’all.<\/p>\n

If what you say is true. The Shaolin and the Wu-Tang could be dangerous<\/h2>\n

As you would expect, this situation led some talking heads to raise some alarming questions about mining centralization. For context, this is not the first time mining gets awkwardly consolidated.<\/p>\n

Seems every cycle there is a doomsday mining centralization brouhaha and like clockwork someone panics and says we should press the red button.<\/p>\n

2008-2012 the advent of GPU\/ASICs<\/p>\n

2012-2016 network latency lead to GHash<\/p>\n

2016-2020 Bitmain manufacturing monopoly<\/p>\n

2020 till today\u2026<\/p>\n

\u2014 Alex B (@bergealex4) April 25, 2024<\/a><\/p>\n

As I wrote in this week\u2019s Weekly Re-Org, time is a flat circle. The Proof-Of-Work centralization Manbearpig comes out of his cave every cycle. It\u2019s a seasonal happening. <\/p>\n

What\u2019s rather unusual is for one of the most senior developers in this space to go full DEFCON 1. <\/p>\n

Let\u2019s work on a PoW change now.<\/p>\n

\u2014 Matt Corallo (@TheBlueMatt) April 26, 2024<\/a><\/p>\n

I will leave it to more serious journalistic outlets like the Bitcoin Bugle to speculate on the strange coincidences between this outburst and the fact that Matt\u2019s employer has mining ambitions.<\/p>\n

Look, it\u2019s not pretty. I think we can all agree that such a significant portion of the hashrate being at the mercy of a handful of bankers is gross. Bitcoin\u2019s security relies on miners aligning with their financial incentives. If that is the outcome, something\u2019s wrong and censorship resistance is at risk.<\/p>\n

The reaction, though, is unwarranted. Bitcoin mining has followed noticeable growth patterns throughout its history and this particular one is not different. It is a market driven by economics and not by code. Inefficiencies arise at every stage and are subsequently dampened as the industry progresses. <\/p>\n

I understand every man who owns a keyboard looks at everything like a bug but the current reality does not fit this framing. <\/p>\n

Everyone applauds the work that has gone into StratumV2 to optimize the mining interface but it\u2019s not an answer to the current predicament. Even if they can be custom, transaction templates are still permissioned. The pools can always reject any transaction they deem haram. Patronizing operators for showing little interest in the solution and miners for not demanding it is verging on hubris. <\/p>\n

Custom transaction selection cannot be relied upon for censorship resistance. Only the market can realistically address this problem and it just so happens that Bitcoin is explicitly designed to be robust to mining majorities. Using fees, users create a financial incentive for competing miners to drive enough hashrate behind a transaction for it to be mined. Curiously, this implies that, in a perfect world, every miner is mining off of the same template: the most profitable one. <\/p>\n

In practice, things are a little more shall we say\u2026 spooky. As uncomfortable as this may be, censorship is inevitable. Following this week\u2019s events, the writing is on the wall and while a lot of grief is given to Chinese miners, it seems most likely to come from our side. <\/p>\n

By far the most disappointing aspect of this agitation is the endorsement of a change to the Proof-Of-Work algorithm<\/a>. The threat being levied against us by the State as we currently speak makes the rhetoric around firing miners especially aggravating. It\u2019s tone-deaf and shows a complete lack of discernment about the challenges before us. Divide and conquer, anyone?<\/p>\n

To make matters worse, we know that throwing the baby out with the bath water is a recipe for disaster. Changing the algorithm. \u201cFiring the miners.\u201d It achieves nothing. <\/p>\n

Again, the technocratic mind is blind to any issue not resolved by a pull request.<\/p>\n

By going scorched earth, you ensure that only the most well-capitalized participants will ever participate in your game. Hashrate can be wiped away at the stroke of a key but technical prowess and large enough bags can endure nuclear winter. The ASIC manufacturer market likely resets to a single player, one who already specializes in custom algorithms. Monopolies relish nothing more than good old interventionism to help shed the competition. <\/p>\n

From a consensus perspective, the idea is so absurd it flies in the face of the entire premise of the system. <\/p>\n

If Bitcoin requires social coordination to throttle the whims of the market and fiddle with its incentives, it is a failed project. Proof-of-work is an economic design, not a technical contraption you can fix with code.<\/p>\n

Wu-Tang Financial<\/h2>\n

Well, I can only humbly propose we begin to consider addressing market dynamics with market solutions.<\/p>\n

To the best of my understanding, the underlying issue is related to Bitcoin\u2019s capital markets. Resourceful actors who quickly caught on to the issue faced by smaller mining operations have filled a hole in the market and left no room for anyone else. Economies of scale and the perceived risk associated with mining have kept competitors at bay. <\/p>\n

There is an opportunity here for a handful of ambitious players to bring balance to this market and allow pools to source capital without bending the knee to larger competitors. This won\u2019t happen overnight. Relationships must be built and the general information asymmetry that has plagued this market must be addressed. <\/p>\n

This is why we must stop burning bridges. <\/p>\n

Of course, technical improvements can also be made to mitigate the underlying variance problems but they cannot remedy the growing pains of an immature market.<\/p>\n

Bitcoin, in every respect, is going through its teenage years. No one wants to be told what to do and pushing one way will inevitably lead to resistance. Sure, there might be no rhyme or reason to what some participants decide to do but it\u2019s not anyone\u2019s place to decide for them.<\/p>\n

This too shall pass. Until then\u2026<\/p>\n

Wu\u2010Tang Clan Ain\u2019t Nuthing ta F\u2019 Wit<\/p>","protected":false},"excerpt":{"rendered":"

The always-relevant Marty Bent had Spiral developer Matt Corallo on his podcast this week to address the freaks about urgent Bitcoin mining matters. To bring everyone up to speed, the concerns stem from recent sleuthing of the blockchain which revealed that some pools have been getting perhaps a little too cozy. How do we know […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-24703","post","type-post","status-publish","format-standard","hentry","category-crypto-news"],"_links":{"self":[{"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/posts\/24703"}],"collection":[{"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/comments?post=24703"}],"version-history":[{"count":0,"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/posts\/24703\/revisions"}],"wp:attachment":[{"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/media?parent=24703"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/categories?post=24703"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoins-101.com\/wp-json\/wp\/v2\/tags?post=24703"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}