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What Is Mining Centralization?
Centralized cryptocurrency mining is the concentration of mining in only a few entities. Cryptocurrencies were originally introduced to remove the centralized control of currency from governments, banks, and other financial institutions and place it in the hands of the public.
However, this design ultimately failed for many reasons—one of the most significant reasons is that it was very quickly realized that (at the time) minable cryptocurrencies promised an easy way to generate large returns. This created a global race to have the most processing power, which led to mining’s centralization.
Key Takeaways
- Cryptocurrency mining centralization occurs when a few entities control most of a network’s hashrate using large mining facilities and mining pools.
What Drove Centralized Cryptocurrency Mining?
Ever-increasing cryptocurrency prices led to more price speculation. Demand for machines that could mine cryptocurrency skyrocketed, because all you needed was a capable rig and you could make money.
This drove prices higher, feeding the frenzy to make faster mining machines. Graphics processing units (GPUs), once the fastest-mining hardware available, were grouped together to work in tandem. Some machines had more than eight top-of-the-line graphics cards, but even that turned out not to be enough to eventually keep up with the rising hash rate requirements.
People then created application-specific integrated circuits (ASICs) for mining. ASICs are computers designed for a specific purpose (as opposed to general-purpose computers). These computers are far faster at running information through algorithms than GPUs and CPUs. They require large amounts of energy and lots of cooling, and are very expensive. Within a short time, multiple ASICs were required to be able to keep up with the networks. These collections grew and grew until large facilities emerged, sometimes with thousands of ASICs running 24 hours per day.
Why Centralized Mining Is a Concern
Only businesses or people with access to large amounts of capital can afford to run these facilities. For example, Marathon Digital Holding (MARA) has several mining facilities, and had—as of its second quarter 2024 report to the Securities and Exchange Commission—approximately 250,000 mining rigs operating. Even with this many miners, MARA only accounts for slightly more than 4% of block creation. There are many other businesses engaged in cryptocurrency mining, each with large concentrations of mining rigs, competing with each other to mine the most cryptocurrency. Four of these are so large they comprise more than half of most minable cryptocurrency hashrates. There are many individual miners that join these pools, but the majority of the hashrates come from the businesses themselves:
- Digital Currency Group (Foundry Digital mining pool)
- Bitmain (Antpool mining pool and popular ASIC manufacturer)
- ViaBTC (ViaBTC mining pool)
- F2Pool (f2pool mining pool)
According to blockchain aggregator Mempool, ten pools find the cryptographic solutions to more than 92% of Bitcoin blocks.
Centralization’s Impact
The impact of the centralization of cryptocurrency ecosystems is that companies will undoubtedly continue to control the hashrates of the most popular and valuable minable cryptocurrencies. Most of these cryptocurrencies halve their rewards in regular periods, which means that there will be fewer coins introduced with each halving event. The main concern is that if demand remains the same, mining will become even less profitable for those who do not contribute enough hashrate to the networks (non-ASIC miners or miners with only a few ASICs). Mining difficulty will increase as network hashrates continue to rise as mining companies add more and more ASICs to their facilities to remain competitive.
Energy use will increase, and the networks of mining businesses could control the development of minable cryptocurrencies. For example, four businesses already own more than 51% of the Bitcoin network’s hashrate. If they were to collude (and it was profitable to do so), they could alter the blockchain’s state. Additionally, if the Bitcoin development community decided to make a drastic change to the blockchain, the companies could refuse to update their software to the latest version. Because they are the majority of the network, their blockchain version would remain the longest, and act to override the community’s decision.
The Future of Centralized Mining
With the dwindling rewards and increasing hardware requirements, only those with large facilities of mining rigs will be competitive enough to receive block rewards. This means businesses will be the ones generating blocks and receiving new cryptocurrency—which then leads to businesses controlling all of the currency being generated. This is not ideal when the original intent was to create a financial system that removed intermediaries and was controlled by the public.
Profitability and greed have led to the centralization of systems that were intended to be decentralized. This will likely always be the case when something is created to benefit the masses. Cryptocurrency is no different in this respect because there is money involved. As long as cryptocurrency mining promises the possibility of returns, it will remain centralized.
Is There Any Centralized Cryptocurrency?
While cryptocurrencies were developed to be decentralized financial and payment systems, they have nearly all become centralized in some respects. They are increasingly falling under regulatory frameworks and becoming concentrated in the hands of few people. The way many of them are put into circulation is also being centralized, as is the way they are exchanged.
Is Bitcoin Mining Decentralized?
Initially, Bitcoin mining was decentralized. As the cryptocurrency gained popularity and market value, mining became more centralized because the design of the blockchain was to increase difficulty as more participants joined. This backfired because participation is measured by hashrate, which increases as more machines join. Large mining farms increased the hashrate exponentially, making it too difficult for smaller miners to have a reasonable chance on their own. Thus, Bitcoin mining became centralized to mining pools, most of which are owned by corporations.
Do Mining Pools Centralize Bitcoin?
Yes. Smaller miners join mining pools to increase their chances of receiving a block reward because they can’t compete independently. The pools are hosted by corporations with facilities full of mining machines, which centralize the network.
The Bottom Line
Cryptocurrency mining has become a centralized endeavor, much to the chagrin of developers who tried to create decentralized financial and payment systems. Centralization was inevitable because there is money involved, and human nature (mostly the biological need to survive, which means gathering and hoarding resources, which leads to greed) causes people to do everything they can to collect and control as much as they can.
At this point, there is likely nothing that can be done to decentralize mining as long as profits or returns are created. Once it is no longer an attractive way of making money, cryptocurrency mining will once again become decentralized.