Bitcoin mining and monopoly

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

Does professionalization and specialization of bitcoin mining result in monopoly?

A short answer is “no.”

Professionalization and specialization of bitcoin mining under competitive Proof-of-Work is less likely to result in a monopoly than most other competitive businesses. Proof-of-Stake, on the other hand, has a natural gravitation toward forming a monopoly or a cartel due to its inherent lack of competition and propensity of collusion.

The subject is an area where fundamental misunderstandings are prevalent. Sometimes it is hard to tell whether it is a result of lack of knowledge, or intentional obfuscation motivated by a hidden agenda (for example, to attack Bitcoin SV’s unbounded competitive mining model, or pave the way to the fundamentally flawed Proof of Stake consensus).

Monopoly is usually bad to the economy and the society, although not always illegal. Only abuse of a monopoly power is illegal.

Given this, what we should try to achieve can be broken down into these separate objectives:

1. How to create a condition that makes it difficult for any entity to achieve monopoly?
2. In case there is already a monopoly despite the above 1, how to create a condition that deters a monopoly from abusing its monopoly power (or incentivizes it not to)?

To achieve these goals, there are three different types of tools available:

technological, economic, and legal.

And it is necessary to consider these separately but with an interactive view.

To the extent the objective can be achieved using technological and economic tools, legal tools should be avoided, not because the law is somehow intrinsically evil, but because the law is almost always costly (not just in legal fees, but in social and economic impedances it creates), less efficient and even counterproductive.

To the above first objective, i.e., to create a condition that makes it difficult for any entity to achieve monopoly:

Technological: the most effective technological tool is to ensure that the best technology is available to everyone with the same market access and price;

Economic: the most effective economic tool is to ensure that the business is only linearly scalable and not exponentially scalable.

Legal: beyond the above, no one should be prevented by any legal means from achieving monopoly.

To the above second objective, i.e. to create a condition that incentivizes a monopoly not to abuse its monopoly power:

Technological: the most effective technological tool is transparency that effectively exposes any wrongdoing to the public, makes it easy to prove any wrongdoing, and enables the system to punish the wrongdoer (or at least to mitigate the consequence of the wrongdoing) swiftly and effectively;

Economic: and the most effective economic tool is to create an economic system in which continuing to do the right thing is more profitable than doing the wrong thing, even for a monopoly.

Legal: ldeally, law should not be necessary. But in reality, intervention by the law is often necessary for preventing a monopoly from abusing its power.

To do the above is hard. There are very few industries, if any at all, that may satisfy all of the above criteria without the help of some legal tools, especially the last one.

But it is also with this backdrop that we may appreciate how much foresight and wisdom Satoshi (Dr. Craig S. Wright, the inventor of Bitcoin) had in designing the Bitcoin system. It almost achieves all of the above without resorting to law. It is the most beautiful yet most misunderstood system. See for example, Proof-of-Work is the only way to prevent corruption; Bitcoin trilemma is a fallacy.

Perhaps the only scenario where Bitcoin may still need to resort to law is when someone commits a clear crime (e.g., theft), which is a crime in itself and does not need a special law such as antitrust law to make it illegal. But this is not an exception. It should be expected in a society that still relies on the rule of law.

The biggest risk of Bitcoin is not a mining monopoly, but a hack at the Core.

The only risk we have with Bitcoin is that it can be attacked by people who create a system that deviates from the original Nakamoto consensus, pass it off as “Bitcoin”, and at the same time fool the public by social engineering into believing it is the real Bitcoin. Hard to imagine but it can be done. In fact, it has been done. The people who did it even did better than that: they were able to lead the public to believe that the real Satoshi is fake or even a fraud.

Sadly, that is the current state of affairs in Bitcoin and digital currency.

Next time, when you have doubt about Bitcoin mining’s energy efficiency and its monopoly prevention, set aside some time to study the economics of the bitcoin mining. Step 1, stop reading anything from the mainstream media. When it comes to blockchain and bitcoin, almost everything that’s popular is wrong ^[1].

This article was lightly edited for clarity.

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NOTE:

[1] But once you look beyond the mainstream veil, there is enough information out there for you to find out the truth. For example, concerning the tech-race in mining, I recommend a reading of “Bitcoin mining—the race to zero? Or race to efficiency?” by Jerry Chan, one of the few individuals in the world who truly understand the economics of the bitcoin mining. For a broader analysis of the economics of mining, please see: The economics of Bitcoin mining.

Watch: CoinGeek New York panel, How to Achieve Green Bitcoin: Energy Consumption & Environmental Sustainability