One of the problems of mining is that it is not worthwhile for small miners to mine independently; they join so-called mining pools to find a block together and divide the reward. However, pooling computing power does not benefit the decentralization of mining.

A kind of lottery

Mining can be seen as a kind of lottery: the greater the percentage of the total computing power a miner owns, the greater the chance that that miner will find the next block and be able to claim the corresponding reward (the block reward). If you buy 20% of the lottery tickets, you have a 20% chance of winning the draw. The same goes for mining.

The problem arises with the investment that is required to be able to participate as a miner to some extent. A small independent miner only controls a small percentage of the total computing power. With this small percentage of computing power, there is little chance that the independent miner will find a block and claim the full block reward.

It is practically impossible for a miner with a very small percentage of computing power to mine profitably. Statistically, even a small miner eventually finds a block, but this could take years. It is therefore not really worthwhile for small miners to participate independently, since the miner must be able to bear the operational costs.

The solution to this problem came in the form of mining pools . Miners join together and pool their computing power. Together they have control over a larger percentage of the total computing power and therefore a greater chance of finding a block. The big advantage of this is that, when the pool has found a block, the block reward is divided among all participants in proportion to the computing power contributed. In this way, a small miner can still receive part of the block reward and count on regular income.

Better hashing

However, pooling computing power also has a major disadvantage: the decentralization among the miners is lost. When small miners join a pool, they relinquish control over their computing power. Instead of running independent mining software, the miners connected to a pool run specific software from the mining pool. This software, as it were, transfers the computing power to the manager of the mining pool.

This theoretically allows the administrator of the pool to use the computing power for malicious purposes. In practice, this has not yet happened, as such an action would not be profitable for the pool manager. The individual miners would also quickly leave the pool when it becomes clear that the pool is no longer acting benevolently. Still, pools with a large percentage of computing power remain a threat.

The administrator of a pool also has control over the creation of the block found: the administrator determines which transactions are or are not included in a block. In general, this is done simply by looking at which trades bring the biggest profit to the miners: the trades with the highest fee take precedence. However, it can also happen that the manager decides to exclude certain transactions: censorship. That is why we are actively working on devising ways and incentives to stimulate decentralization among miners.

Work and pay separated

BetterHash is a proposal from Matt Corallo that attempts to promote the decentralization of mining. Matt Corallo is a long-time bitcoin developer and has contributed a lot to improving the bitcoin network. Corallo’s proposal separates the creation of the newly found block from the payment of the reward. The proposal is cited by many as a very important innovation, but has also gone largely unnoticed.

The clear advantage achieved with the construction from Corallo’s proposal is that a small independent miner can still join a pool, so that the miner can count on regular income, without the miner losing the right to create the next block specifies. In addition, the administrator of a pool can no longer force individual miners to participate in certain upgrades if they do not consider this desirable.

The pool still serves as a distributor of the revenue, but the miner responsible for the block found retains the right to determine which transactions are included in the block. This prevents an administrator from exercising censorship, whether forced or unforced.

According to Corallo and many others, solving the centralization of mining is one of the most pressing topics. It is now hoped that the various mining pools will think the same about this and will apply the BetterHash proposal in practice. The centralization problems have not yet been completely solved with this proposal, but it is a step in the right direction.