Bitmain is all over the news at the moment, and not just for one reason either. There are four separate, yet connected topics concerning the company. Firstly, the company has confirmed it intends to conduct an IPO. Secondly, Bitmain’s mining pools apparently now control close to 50% of the Bitcoin hashing power. Thirdly, it has now emerged that, as of March, Bitmain held over 5% of the BCH coin supply. And lastly, a significant share of the Ethereum community is in favor of making its network resistant to ASIC mining.
There is no shortage of speculation about the timing of the ICO and the real intentions behind it. However, in this post we will focus on the trade-off between security and decentralization, and what it may mean for the crypto industry in general.
In any industry, its to be expected that as it matures, margins will fall, and eventually only a handful or participants will dominate the market. Margins will fall to to the point where only large players that can achieve economies of scale will be able to operate profitably. This is exactly what has happened in the crypto mining world.
The difference in the case of crypto mining is that Bitmain is both a miner and the producer of mining hardware. It is an exceptionally powerful company, and some speculate that it already has the capacity to effectively take over the Bitcoin network. That doesn’t mean it will, but it does mean that the Bitcoin network is no longer decentralized.
By investing heavily in mining hardware, the large mining pools have made it prohibitively expensive for an external entity to acquire enough computing power to conduct a 51% attack. In this sense the network is more secure. However, in the process of getting to this point, the network has also become centralized which is not ideal.
This is already having an effect on the way blockchain developers are thinking about consensus mechanism, security and decentralization. Monero’s code has already been upgraded to be resistant to the ASIC mining hardware Bitmain produces. There seems to be at least some support for a similar upgrade to the Ethereum network.
These developments are likely to be of interest to institutional investors. For crypto prices to break out of the current bear market, large institutions are going to need to step up and start investing. Many in the retail market are already invested, or have been burnt. The next wave of retail investors is unlikely to begin investing until prices begin to rise, which means only institutions are likely to turn the market around.
But, institutional investors are more discerning than retail investors. They do their homework before buying an asset, and the fact that one entity could takeover PoW blockchains is likely to be a red flag for them. Cryptocurrencies are pitched as assets that run on decentralized tamper proof networks. If it turns out that that isn’t true, potential investors may have a problem.
It’s probably not in Bitmain’s intejusrest to mount a 51% attack (though there are probably conspiracy theories suggesting it is), but the fact that they could may be a problem for investors. It may even be a problem for regulators assessing ETF applications, though arguably that’s beyond their mandate.
All of this may work in the favor of networks based on proof-of-stake, delegated proof-of-stake and other consensus mechanisms. It’s impossible to predict whether or not this will really be an issue for investors. But if it is, we will see it in the price action. In the recent sell-off, Bitcoin has outperformed, so it’s almost certainly not of concern yet. But, if or when prices begin to rise again, it will be worth looking at the relative performance of POW coins versus the coins belonging to PoS and DPoS networks.
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