Why Is It That Large Mining Pools Are Bad For Cryptocurrencies?

Where Do The Bitcoin Mining Pool Stand?

What comes as a central tenet of cryptocurrencies is, of course, their decentralized nature. Thereby it is well known in the cryptocurrency lore that anyone with a computer can manufacture a coin by connecting to the mining network. This is why as the popularity and market for cryptocurrencies have evolved whereas the idea seems to have fallen by the wayside. This is where large mining pools with operations spread across multiple countries have become a standard method for minting new coins. 

The fact is that approximately 56% of all Bitcoin is mined in datacenters whereas, for Ethereum, the same figure is 28% while three miners of Ethereum accounted for 61 percent of average weekly capacity. 

While it is true that the centralization of mining pools presents within cryptocurrencies, presenting its own set of advantages and disadvantages, thereby the mining pools themselves have a bearing on its price.  

The Advantages Of Mining Pools 

There is always a philosophical argument for decentralization apart from centralized mining operations offering several advantages. 

To note the first one it is faster processing wherein Bitcoin mining each node competes with the rest of the network to add to the overall blockchain. These blocks are usually found only when other nodes within the network agree to its discovery. This is why having multiple blocks within the same network can speed up the discovery process because it reduces latency or delays.

This helps it iron out discrepancies in internet connections between nodes placed in different geographies whereas in turn more direct network connections between Bitcoin nodes speed up the notification process.

Subsequently, secondly, the large numbers of mining systems within the same network also makes for an efficient mining process as it reduces the number of orphan blocks or blocks that are not selected to be part of the blockchain. 

As many pools also help the Bitcoin mining firms achieve economies of scale as the difficulty of problems is that miners must solve to earn Bitcoin has increased over time which is expected to further increase as the rate of production of Bitcoin slows down. 

It is here on this occasion that the governments, as well as power companies, have nudged Bitcoin mining operations towards mining pools by offering subsidized electric rates just like most industrial products, as the scale is, therefore, they are useful to drive down costs.

Centralization Could Lead To More Power 

On studying the paradigm shift from decentralized to concentrated mining pools it has not occurred without controversies.

It all started with a 2013 paper which was written by Cornell professor Emin Gun Sirer as he claimed that Bitcoin is broken because it enables selfish mining. This type of mining is where a group of miners join forces and hide their generated blocks from the main blockchain. Further on this enables nodes within their network to discover the blocks as well as quickly generate additional blocks. This comes as the hidden blocks are revealed only after the hidden chain of blocks has a length equal to that of the new blockchain. As Sirer states, the profits generated as a result of this type of mining provides incentives for small mining groups to join large ones. 

Consequently, it was found that the launch of Bitcoin Cash which is a cryptocurrency that was forked from bitcoin’s blockchain in August 2017 where it also generated much discussion about the power of Bitcoin miners. This is why Jihan Wu, the CEO of Bitmain threw the resources of mining pools behind the cryptocurrency even as small and independent miners boycotted it. Subsequently, the result was a surge in its price resulting in a high of $ 3,706 in December 2017 while it is trading at $ 945. Well, that’s not a bad trajectory for a coin that is six months old.

Whereas on the contrary there are other more serious charges relates to manipulation of cryptocurrency prices by mining pools where they control the supply of coins to the market, centralized mining pools thereby which can control all its prices by restricting the number of coins available for trading. Regarding this, specific concerns are targeted at Chinese miners who are responsible for mining approximately two-thirds of all Bitcoin in existence currently. 

Sirer said in a Washington Post article that Chinese miners were being painted with too broad a brush as it’s not the case that all Chinese miners are part of the same enterprise or are colluding.

After that, he did point out another problem that could result from China being the world’s largest supplier of coins as they would not be able to usurp funds but they could stop the motion of funds. This is alluding to a situation that could result from the Chinese government’s restrictions on Bitcoin mining. 

The truth is that however, the Chinese government has already called for an orderly closure of Bitcoin mining operations within the country whereas it doesn’t mean a complete shutdown to the creation of all these significant new bitcoins as the Chinese Bitcoin mining firms are beginning to expand abroad.

The Bottom Line  

While continuing on the discussion, it is as a fact that the cryptocurrency mining has transitioned from an operation that was distributed over groups of individual computers to the centralized mining pools involving large investments and industrial outfits. This has brought about a change as primarily as a result of the cryptocurrency’s popularity and increase in transaction volumes. There are then several benefits and drawbacks to the centralization of Bitcoin mining pools.