The Dangers of Mining Pools: Centralization and Security Issues

What are the causes and dangers of centralization in mining, and how can geographical centralization affect the crypto space?

The larger percentage of cryptocurrency enthusiasts that turn to mining pools, all the more dangerous this kind of mining is likely to become. The reason is simple: The potential rewards grow in correspondence with the number of participants and their hash power, and so too does the incentive to profit from it in less-than-legal or acceptable ways for some parties.

Why mine together?

In cryptocurrency mining — just like with real-life gold mining — the days of lone-wolf gold diggers drifting from place to place with their trusty tools in tow, following the trail of the elusive gold seams are long gone. While it is true that some of us can still afford to mine solo, it’s not a viable option for most people, as they do not have enough hashing power on their own to mine blocks consistently.

The infrequency of actually finding a block these days when mining individually is what makes mining pools so tempting for many people. In sharing their resources with other miners, they are able to make the returns steadier and more predictable.

The mining difficulty is only going to increase in the future if more people get into crypto — and they most likely will.

Of course, the utility of entering a mining pool is somewhat undermined (see what I did there?) by several factors. First of all, due to the fact that mining resources and power are shared, so too must be the rewards. Every member of the pool gets reimbursed according to their computing power — that’s only fair. Additionally, however, each participant has to pay a fee to the people behind the creation of the pool.

So far so good. Mining pools are definitely not a bad thing in and of itself. But how can they be exploited or otherwise threatened?

Why centralization is unhealthy

Centralization is a bane to everything cryptocurrencies stand for. The initial vision of the crypto environment was one of equality, but the current state paints quite a different picture. Today, it is rife with competition, and often enough, this competition is unfair and dirty.

Centralization is the natural outcome of the competition in gaining crypto. Since crypto mining is now a full-fledged industry, it is being usurped by those with more resources and more hashing power. They are now firmly in charge, and that’s unlikely to change.

This problem being a growing concern in the crypto world was confirmed by Marco Streng, CEO of Genesis Mining, who underlined that the levels of centralization are “quite alarming.”

A common spooky tale about centralization is, of course, 51% attacks. They occur when a miner possesses more than half of the network’s hashrate, allowing them to make proof-of-work consensus their tool. This can lead to bad actors enabling double spending — that is, having their coin and spending it at the same time.

If there is one good thing about 51% attacks, it’s how unlikely they are. The cost of securing more than 50% of the network’s hash power is very high, and the more people join the network, the higher that cost gets.

For an individual or a group of miners, such an attack would not be cost-efficient, if not impossible, to carry out. So, unless a state is involved, 51% attacks remain more of a boogeyman than a real threat to larger networks.

Mining centralization also happens based on the location of the pool. As the profitability of the mining operation is highly dependent on electricity costs, it is natural that miners are drawn to regions where such costs are lower. In China, for example, the average household electricity price is at $0.08 per kWh, which is $0.07 lower than in the United States. 

Here is what’s scary, though: As of last year, 74% of Bitcoin’s hashing power has been distributed across five mining pools located in China. As we all know, China isn’t the freest state on the planet, and the level of governmental involvement in pretty much all spheres of life is quite high there. Despite not being in direct control of this power, the Chinese authorities can absolutely influence the managers of those pools.

So, is China going to perform attacks to spend those coins twice? Not likely. However, it is certainly possible that it could disrupt the functioning of the network, weaken the consensus, and influence economies of other countries that rely on Bitcoin.

Unfortunately, given the relations that China has with the rest of the world — specifically Western powers — such attacks are likely to happen sometime in the future if the situation doesn’t change.

Other security issues

Don’t listen to anyone who tells you that Bitcoin is a completely anonymous currency. It isn’t. A user’s IP address can still be connected to their transactions.

With so many major pools located in China — a state notorious for its surveillance practices — miners should be concerned about the dangers of the exposure of their IPs. This especially concerns Chinese citizens and other people who live in China.

The greatest danger for them is the possibility of deanonymization. If China decides to double down on its cryptocurrency regulations, those of its citizens who have participated in Bitcoin transactions could face legal problems.

Conclusion

Centralization, though a seemingly natural process fueled by competition, has led to Bitcoin straying far from what it was supposed to be. With most of the large mining pools situated under Chinese influence thanks to the country’s lower energy prices, there is a very real possibility of many things going wrong.

The worst thing for regular miners is that there’s little they can do about it. Unless their governments take serious steps to better their relations with China, and unless China is willing to improve its relations with other countries, this situation will not be resolved.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.