TD₿: Protecting Bitcoin’s Censorship Resistance by BitMEX Research feat. Dylan LeClair
TL;DR Ultimately, the censorship resistance of Bitcoin stems from the economic incentives of proof-of-work mining.
Hey Bitcoiners,
In the last couple of issues of this newsletter, I have focused on the centralization and censorship resistance in Bitcoin’s Proof of Work protocol and Ethereum’s new Proof of Stake protocol.
If you missed them go check them out. In one issue, I focused on the development of Stratum V2, which will help make Bitcoin mining less prone to censorship from mining pools. In the other issue, I brought up points around how Ethereum is already showing signs of increased centralization after its transition to Proof of Stake, with ~60% of ETH staked being controlled by four entities today.
After sharing the Ethereum staking data, instead of getting any kind of direct response to the issue of staking centralization, I received a slew of angry responses from Ethereum proponents that can be aptly summarized as “whataboutisms” around Bitcoin mining pools.
Here is a prime example:
The comparison between staking pools and mining pools is a false equivalency and demonstrates a misunderstanding of how Bitcoin mining works, and the differences between the two consensus mechanisms.
The key point to understand is that mining pools are not miners and do not control the ASIC machines and, thus, the underlying hash rate. Miners can point their hash rate towards any mining pools they want, and if a pool were to act against the interest of the network, it’s easy for miners to switch to honest pools by changing a single line of configuration.
In a Proof of Stake protocol, a centralized staking pool like Coinbase, which holds custody of the underlying ETH, can make it difficult for stakers to leave the pool. A staker can leave the pool by removing their ETH…if the custodian gives them permission that is. In Proof of Work, miners can change pools in a few seconds if need be without asking for anyone’s permission.
HodlMagoo sums up the main difference in a nutshell…
In fact, this dynamic just played out in Bitcoin a couple of weeks ago when the Poolin mining pool froze withdrawals after experiencing liquidity issues. After this action, Poolin’s hash rate was cut in half essentially overnight as Bitcoin miners shifted their hash rate elsewhere.
Below is a great chart from the Bitcoin Magazine PRO team that highlighted this.
The other key understanding here is that it’s all about the economic incentives and game theory. If a mining pool were to start censoring transactions, then other mining pools that choose to not censor will receive all the windfall in the form of higher profits as miners shift their hash rate over to them.
BitMEX Research wrote an article featuring Dylan LeClair that dives into Stratum V2 and the economic incentives I mentioned above. (08/26/2022)
The moral of the story is — the centralization of staking pools and mining pools is not remotely the same thing and if anyone makes that comparison to you with a straight face, it should immediately raise your eyebrows.
Tick tock next block,
Cory Klippsten
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Quote of the Day
“For those still confused, you can switch between bitcoin mining pools in literal seconds. The owner of the pool does not control the miners. He is just providing a service of redistributing mined coins based on who and how much they worked.” - AdamVulture, Bitcoiner
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Custodia sees a future where all banks will need to support digital assets and provide a responsive, online interface to tech-savvy customers. It is already a chartered bank, and they need a Bitcoin Engineer to help them in launching a US dollar clearing bank that provides custody services for Bitcoin.
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