One of the main Bitcoin memes that has popped up rather frequently over the past two years is the idea that the incentives related to Bitcoin mining are not structured properly. Securing the blockchain is the work that miners are paid for through the issuance of new bitcoins, and the incentives are supposed to be structured in a way that does not give one mining entity too much power. In a situation where a single miner or a mining pool controls a large percentage of the network hashrate, it actually becomes possible for that mining entity to cause some trouble when it comes to clearing transactions. The act of bookkeeping is what was decentralized by Bitcoin, so it’s vital for that feature to remain at the core of Bitcoin’s functionality.
The Problem of Mining Centralization
When Bitcoin’s network hashrate becomes centralized in a handful of mining pools, the validity of its decentralized nature becomes questionable. After all, Satoshi’s original intention when he created the digital currency was to create a mining system that allowed one vote per CPU. Mining has become more centralized over time, due to the proliferation of GPU mining, FPGA mining, and finally ASIC mining. This centralization has led to many new perceived threats to Bitcoin, such as a great barrier of entry for mining bitcoins and the possibility of a 51% attack.
Alternative Proof-of-Work Hashing Algorithms
In reaction to the centralization of Bitcoin mining that has taken place as a result of ASIC mining hardware, some programmers have decided to create new cryptocurrencies that use different hashing algorithms for the mining process. Bitcoin uses SHA-256 as its hashing algorithm, and any piece of mining hardware built for mining bitcoins can also be used to efficiently mine any other cryptocurrency that uses SHA-256. Litecoin, the world’s second most popular cryptocurrency, uses scrypt as its hashing algorithm. The original intention of this choice was to avoid mining centralization, but it was only a matter of time before ASIC miners were also created for scrypt functions. The main issue that blockchains that use alternative proof-of-work functions have found is that someone will always be willing to make an ASIC as soon as a cryptocurrency becomes relatively popular.
Is This a Pressing Issue?
It would be disingenuous to say that Bitcoin mining centralization is not a problem, but the reality is this issue has been known for quite some time. Any work on preserving the decentralization of mining in Bitcoin should be applauded, but the incentive structure seems to be working well enough right now. Even in a recent case where GHash.IO was able to take control of 51% of the network hashrate, the incentive structure of Bitcoin forced them to voluntarily cut down on their share of the mining power. After all, any mining pool will not want to participate in any kind of activity that effectively lowers the value proposition of the very commodity that they are spending money to mine.