When I first read Satoshi Nakamoto’s whitepaper, I fell in love with its idealism. A peer-to-peer electronic cash system is inclusive. It empowers people to have control over their money. Coming from Brazil, I saw hyperinflation first-hand, so I knew the value of having optionality and not relying on one single government-controlled central bank or large banking corporations.
At a glance, proof-of-work (PoW) sounds like something righteous and fair: It gives power to whoever does the work. In Bitcoin’s case, that means the miners. Unfortunately, words can be misleading. Although it seems like PoW empowers actual people to make money, today the power is really in the hands of companies that run massive node operations.
This story is part of CoinDesk’s 2023 Mining Week, sponsored by Foundry. Breno Araujo is the founder and CEO of Boto.
There is a real incentive to centralize the mining operations that run and secure the Bitcoin network, due to economies of scale. The larger the miner’s operation is, the more cost-efficient it will be, maximizing its rewards. And smaller miners are pushed out. Of course, bitcoin mining’s evolution from something you can do on your laptop, to the dominance of graphics processing units (GPUs) and later ASICs (or application-specific chips) is well known.
This centralization can be seen in the numbers. According to the National Bureau of Economic Research, at one point in October 2021, 10% of the miners controlled 90% of the Bitcoin network, and .01% controlled about 50% of the network. 50% is all that is needed to take control of the network. Even today, it’s likely the same few dozen miners that have dominated bitcoin mining for years, even though many have been routed by the bear market.
The whole thing starts to resemble an oligarchy. Are bitcoin miners just oligarchic technocrats?
Proof-of-stake is a plutocracy?
None of this is meant to excuse proof-of-stake, the supposedly eco-friendly option when it comes to securing blockchains. When moving from PoW to PoS, the Ethereum Foundation cited the environmental benefits of the move as one of the key arguments for the change. It’s hard to deny the Merge helped reduce Ethereum’s carbon footprint, but it’s worth noting who really benefited – after all fees barely budged, and now Ethereum’s rich are only…
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