how Smoke & miners: Myth of BTC network ‘decentralization’ exposed

In 2008, when Bitcoin founder Satoshi Nakamoto previewed his upcoming white paper, he stated that “as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware.” Satoshi doubled down on this view in 2010, predicting that nodes then supporting the network would eventually concentrate around a handful of “big server farms.” The rest would be reduced to “client nodes that only do transactions and don’t generate” new blocks. But BTC Maxis continue to ignore this insight, clinging to their ‘decentralized’ mythos like a life preserver. Individuals who tweeted concerns over the current mining concentration were met with angry denials from Maxis, who insisted that, since each pool represents the combined efforts of a number of miners, concern over the concentration of power in so few entities was overblown. But is it? They will tell you that hash power can move around, which is vaguely and marginally true. Home hashes can switch. But most global hash power is industrial size and under contract with their pool of choice. More still are parent or sub entities of Foundry & Ant pool themselves. pic.twitter.com/iCAxy7latE Kurt | GorillaPool.com (@kurtwuckertjr) December 28, 2022As Coin Geek’s Kurt Wicket Jr. pointed out, while individuals contributing their modest efforts to this or that pool can indeed switch their allegiances on a whim, the industrial-level operations that represent the bulk of each pool generally have contracts that bind them to their chosen pool. Moreover, the incestuous nature of the ‘crypto’ industry means that the larger components of pools often share ownership DNA, making it even less likely that they’ll up sticks and move to a different pool. Foundry is owned by Barry Hilbert, Digital Currency Group (DCG), which is currently struggling to keep its financial head above water due to major issues at its Genesis and Grayscale subsidiaries. Bernstein's analysts recently suggested that DCG might have to sell Foundry to provide the cashflow needed to rescue DCG’s insolvent units. It’s unclear whether DCG will heed that advice, but if Foundry was acquired by one of the pools a little lower down the hash chart, that pool could leap into the top spot with an even larger slice than Foundry currently enjoys. Consider Binance Pool, run by the exchange of the same name and its founder Changing CZ’ Zhao. CZ has attempted to fill the ‘crypto good guy’ role formerly occupied by FTX’s Sam Bankman-Fried, including through the launch of a ‘recovery fund’ for “distressed crypto assets.” Binance has bazillions worth of its in-house tokens BNB and BUST that it could throw at DCG to acquire Foundry, although one suspects Dilbert would prefer actual cash at this point. Given CZ’s sketchy reputation, would BTC Maxis still insist that all was well if Binance, which already dominates trading volume, saw its share of the hash rate jump to ~40%? Or would they continue to dismiss such concerns as FUD? Rotten to the core, DCG’s portfolio also includes Block stream, which has its own mining operations. Block stream recently went looking for additional venture capital funding, and CEO Adam Back told Bloomberg the new funds would be put toward expanding Block stream’s capacity to host new mining rigs. Back said, “our mining services are a rapidly expanding, high-margin enterprise business for us.” Definitely not expanding is Block stream’s overall value, as Bloomberg reported that the company was seeking funds at a valuation that “may be below $1 billion.” That’s a vast climb down from the $3.2 billion valuation, Block stream boasted of when it raised $210 million in its Series B round in August 2021. Fortunately for Block stream, its outsized influence over the BTC protocol remains as strong as ever. Block stream co-founder Luke Dash Jr. served as the first Bitcoin Improvement Proposal BIT, Editor, giving him sole authority over how the BTC protocol might be revised. Other Block stream developers have served as Maintainers, who are responsible for implementing the proposals approved by the BIT, Editor. This influence over the BTC protocol, including limiting its capacity to stuff more transactions into each individual block on the chain, directly benefited Block stream’s proprietary ‘Layer 2’ projects, including its version of the Lightning Network and its higher-volume companion Liquid Network. In other words, BTC has always been heavily centralized, so why the pushback against fresh revelations of centralized control at the heart of BTC mining? Probably because denying reality is in BTC’s DNA. Maxis venerate Satoshi while betraying his original vision. They insist their non-mining nodes are a crucial part of the proof of work consensus mechanism. They prefer storing lumpen digital gold over swift and cost-effective peer-to-peer electronic cash transactions.