The Recentralization Of Bitcoin Can Be Traced Back To Its Design

We have been witness to a narrative war on BTC
BTC
versus Fiat since the birth of bitcoin. The coinbase transaction of the genesis block contained a reference to the Times headline of Jan 3rd 2009. The following text is hardcoded const char* pszTimestamp = “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”; This string was put into the signature field of input transaction of the coinbase transaction. The September before that in 2008, Lehman collapsed. I was witness to many of my former colleagues streaming out of the building clutching cardboard boxes. Some with a bewildered look on their faces, some openly weeping. Luckily, I was working in a European Bank. Albeit, one that had with its actions pre-announced the crisis. I was also working in the mortgage IT department. Mortgage backed securities were the epicenter, where the crisis first started. By early 2009, the Financial crisis was in full swing.

In addition to this, Satoshi makes their view very clear in a post “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Such is the gospel of bitcoin. All bitcoin maximalists preach this. They are everywhere: Instagram, Tik-Tok, LinkedIn, Twitter, websites galore. In the second quarter of 2024, bankers and fat cats control the price of bitcoin through ETFs. The mining vampire krakens are feeding on energy on a global scale. Miners have been centralized for a while in pools, a fact that can be observed through block explorers. When I checked early Saturday May 4th, 2024, the last ten blocks were mined by 4 mining pools, five of those blocks were mined by just one pool. Now evidence is emerging that centralization is worse than we expected. This evidence is what we will look at. There may also be more benign explanations for the observed patterns.

Scarcity is baked in since the debasing of the currency is anathema. This is one of the fatal flaws in the system. Satoshi was a programmer and a cryptographer, they did not have a firm grasp on the way money supply works. This is evident in the first exchanges with others on the first ever announcement of bitcoin. Sepp Hasslberger was already questioning the scarcity principle on February 20, 2009. Sepp said that as more people adopted, you need more coins as “Stability of the coins’ value is desirable for long term use.”. Any currency used for payments cannot be limited in its issuance as more and more people join the system. That was evident with wampum, with pieces of eight, with silver, with gold. We have journeyed far from Satoshi’s dream of decentralization and micropayments even if L2s like Lightning are trying to solve the micropayment problem.

With the gift of hindsight we see how the system worked out. The increasing value and the scarcity of bitcoin drew miners and hodlers, not buyers of pizza in pizza shops. The brilliance of the proof-of-work turned against it, with 600 plus etahashes/second of hashing power backing it. Etahash is a billion billion hashes. Scarcity and the huge value of a single bitcoin doomed it as a payment system, it also drew enormous operations that could be colluding behind the scenes to centralize it even further.

A bitcoin developer and researcher named 0xB10C announced on X that looking at the merkle branches that mining pools send to miners BTCcom pool, Binance pool, Poolin, EMCD, Rawpool, and possibly Braiins have exactly the same template and custom transaction prioritization as AntPool. He was implying that under the covers they were all controlled by the same entity. Further data from @mononaut added UltimusPool to the list.

Hashing power is important because mining is a lottery. The current situation is as if 10 or so pools have bought up all the lottery tickets (hash power). The winner is usually the one with the maximum number of tickets. Chance operates, so even smaller pools with fewer lottery tickets can hope to win once in a while. There is no hope for a lone individual miner today. Satoshi mined the first block on an ordinary computer. In the early days you could mine using laptops in a college dorm. This was the vaunted decentralized mining. No more! mining farms and pools of computing power churn away, some co-located with hydro-projects, they cluster in low cost energy locations. Kazakhstan, Texas etc. It is a big business driven by price and scarcity. As mentioned earlier maybe 10 to 20 pools mine almost all the blocks and get rewarded with the coinbase transactions and fees. There is cutthroat competition.

In order to understand mining templates which are referenced in the original tweet, we have to look at the way bitcoin mining works. A bitcoin transaction from a wallet or any other source goes into a holding area called the mempool. Miners choose transactions from the mempool to mine. This is meant to be a fee market. That is, they will go for the most fees that they can gather into a block, choosing transactions that fulfill that condition. The mempool is the purgatory, not confirmed transactions stuck in waiting to be in blocks. All sorts of games can be played at this stage, miners choosing transactions based on external payments, censoring some etc. Most of these go against the stated ethos of bitcoin. In a later article on Miner Extractable Value as applied to bitcoin and ethereum, I hope to dig a little deeper.

In order to win the lottery, you have to start throwing the 256 sided dice as fast as you can. Block building time has to be minimized. Hence the use of pre-filled templates, which are communicated via a protocol named Stratum, which operates between the members of a pool. 0xB10C found that many merkle branches (sub blocks) bore the same pattern of transaction prioritization across multiple pools. This points to a pool of pools centralization.

Under the hood many are one. This would mean even more centralization than previously thought. Of course, some pushed against this narrative. There may be more benign explanations, they say. 0xB10C knocked all of them down. To get a better idea of the nuances look at the X thread linked above.

I am a fan of bitcoin and its technical underpinnings. It is a great success story. Better economic choices could have been made. A payment system has devolved into a speculative holding and the site for a culture war. The incentives push the whole system into centralization, in mining, in holding. The basic functions and economic design cannot evolve, unless drastic changes are made. Provision for such change was never part of the system. Scarcity is a feature which is also a bug. Many diligent, brilliant people work on the code and on the periphery. Ethereum
Ethereum
, for one could not have been possible without bitcoin. Work on fee markets, on securing public infrastructure, on network effects etc. is ongoing. Code, process and crypto-economics is a net positive for the world. Bitcoin is not rat poison squared, nor is it ambrosia; the food of the gods.