Or Has the Bitmain Mining Dominance Ended Forever?
It’s been a hot topic and widely covered in mainstream crypto bashing outlets and the crypto headlines – Bitmain holds dominance over Bitcoin due to its monopoly on mining equipment and powerful mining pools.
Is it true? On the surface, we can easily see how power has centralized on the otherwise decentralized currency and economic protocol that is Bitcoin. So if Bitcoin is in centralized hands, it’s a failure, right? But if you scratch even lightly, you find there’s a lot more to the story.
Mr. Dowd describes a natural monopoly as “…a market in which production is most efficient with a single producer.” This does make sense when you think of Bitmain’s market dominance over Bitcoin mining.
Down’s arguments include:
- Mining is a natural monopoly – here he states that because of ‘atomistic competition,’ mining firms will become bigger and bigger until they collapse. Furthermore, he states that mining undermines and threatens Bitcoin’s core value statement – decentralization.
- Because of zero regulation entry barriers, an inferior product cannot last.
Is Bitcoin an inferior product? It’s an economic system that runs and corrects itself. Its protocol makes tampering with it cause severe economic havoc to the tamperer. It enables one to send currency to anyone in the world, at any time of day, for a couple of bucks and taking only a minute or two.
Why won’t Banks do this? How much are the banks worth? How much of our money do they have invested and in what? Do you own your bank deposited dollars? Seems to me Bitcoin is not an inferior product, though I do admit at this stage, it’s hard to spend it day to day.
In understanding the monopoly theory with Bitcoin, we have to look closely at Bitmain, the Beijing based mining powerhouse.
How Much Control Did Bitmain Have?
Chinese company Bitmain made between $3 and $4 billion in 2017 by producing specialized mining chips for cryptocurrency mining rigs. Over the past few years, they’ve been continually developing efficient mining rig equipment at an ever-quickening technological speed at an alarming scale.
At one point, their two mining pools, which used Bitmain’s ASIC mining rigs, were controlling 54% of Bitcoin’s hashrate. More than enough to make a 51% attack a possibility. But what’s a possibility if when in reality, it would destroy your business? Is it still a possibility? Yes. Is it likely? It doesn’t seem so.
Just like most topics in the cryptocurrency space, the monopoly theory has been hyped up to the point where it no longer makes sense. In January of 2019, Bitmain’s two mining pools contributed to about 23% of the total hashing power. Six months ago, Bitmain’s share was 41%. Some reports estimate that at some point in the past, Bitmain enjoyed a 73% market share in the mining community.
The Slippery Slope
Now, just last week, two senior, founding members of Bitmain stepped down, though they still own substantial shares in the company. All this while news stories popped up attesting to Bitmain’s suspension of operations in a Texas mining facility. Additionally, they closed up shop in Amsterdam and a little over a month ago, Bitmain shut down an R&D facility in Israel, laying off the entire staff.
Their centralized control is waning. This may be due to many factors, including:
- Some say the bear market was what caused Bitmain to start closing up shop and laying off employees in mid to late 2018.
- ASIC resistant technology has been gaining speed, which makes Bitmain’s policy of super-hyper-driven tech advancements seem a little ridiculous. Thus far, ASICs, the type of mining rigs built and used by Bitmain, increase the barrier of entry for “decentralized” miners from all corners of the globe and walks of life. The technology was improving at such a fevered pace to become better and more efficient, that ASICs were quickly becoming obsolete when faced with the latest round of innovation. Mining rigs that are ASIC resistant have algorithms in place do discourage out of control ASIC development. This way, smaller participants have more of a chance to enter and stay in the mining industry.
- Bitmain is now seeing competitors coming into the crypto space, including South Korean tech beast Samsung, which has partnered with Squire to begin mining rig production in earnest.
- Bitmain is now being sued on several fronts. Most recently, UnitedCorp filed charges against Bitmain (among other participants, including Rober Ver and Kraken) for manipulating the Bitcoin Cash hard fork in Q4 2018.
Putting the Monopoly Theory to Rest
“I don’t think the centralization is going to last. The centralization was an artifact of performance increases that no longer exist.” – Andreas Antonopoulos
Even when Bitmain was at its most powerful, it wasn’t a complete monopoly. There were still many miners far and wide, so centralization was not wholly there.
Perhaps the most ironic thing about the whole Bitmain monopoly ruining Bitcoin’s decentralization topic is that one of Bitmain’s Co-Founders openly discusses the centralization of cryptocurrency. Basically, the plan was to create a private, blockchain-based central bank. Kind of takes the fun out of decentralization.
Why an Attack Still Seems so Far Off
Maybe the power that Bitcoin miners can achieve long term has been overestimated. Because in order for them to take control, their own financial interests in the system would be ruined.
It seems again that Bitcoin has corrected itself, only this time in a way no one could predict. We saw it with Bitmain – all it takes is a market falter for them to begin crumbling. Meanwhile, Bitcoin remains as robust as ever. The open source and globally available decentralized entity that is Bitcoin allows for continual, distributed improvements. And while Bitmain is shutting down its facilities, individual miners are still doing their thing, albeit with not as much profit, if any at the moment. But their vision, like most of us, is for the long haul.
Even if Bitcoin fails because of monopolistic leanings, a new coin can just be started. Developers have all the knowledge plus the experience learned through the years, and could conceivably create something even better. Just because a product is inferior, doesn’t mean it can’t be worked on. That’s not the end of it. Re-decentralization leading to a stable decentralized currency is always a possibility now.
Also published on Medium.