Adding blocks is a laborious and competitive process. Nowadays, miners rarely ever add blocks themselves. Rather, blocks are almost always architected and added by entities called mining pools, in order to get rewarded with new bitcoins and transaction fees from the block. However, mining pool centralisation is seen by some as a risk, as it could be a gateway to 51% attacks. In this article, CoinShares Research dives into the following question: is a 51% attack hypothetical or could it really happen in the future?

Bitcoin block production & the eventuality of a 51% attack

Key takeaways: 

  • 51% attacks occur when a rogue network user obtains more than 50% of the mining power on a certain blockchain to alter new transactions.
  • The centralization of mining pools will not pose a significant threat of a 51% attack on Bitcoin in the future due to minimal economic interest.

In Bitcoin, batches of transactions (blocks) are periodically added to a shared transaction record (the blockchain). Miners compete to add each block in a laborious process that, if done in accordance with the protocol rules, rewards them with fresh new bitcoins and transaction fees from the block.

Instead of individual miners, blocks are almost always architected and added by entities called mining pools. Pools both coordinate and pay for the work of miners, forming a larger group of affiliates that can more consistently churn blocks and capture rewards compared to an individual, as they increase their collective chances of successfully adding the next block.

The advent of pools has had two particularly interesting effects.

  1. Miners can reduce the variance of earning rewards by selling their work to a pool, allowing for better financial forecasting, stable cash flow, and less risky ventures.
  2. A large share of new blocks is now added by a more concentrated set of entities, leading to centralisation risks.

Concerns mostly revolve around the risks of 51% attacks, which suspend payments between some or all users by preventing new transactions from gaining confirmations when a malicious user on a network accumulates more than 50 percent of the mining power on a particular blockchain.

However, despite worries of particularly large mining pools posing a security threat to Bitcoin, there is no evidence of a successful pool attack to date. That being said, in order to keep on top and ahead of this issue, it is worthwhile to better understand the story of Bitcoin’s block production and see when the risk of mining centralisation was at its peak.

The Chinese Mining Ban has Distributed Block Production and Balanced Pools

China used to be the largest country for the concentration of mining activity in the world. However, in early May 2021, China set out forceful prohibitions on crypto mining, causing a large exodus of mining operations from the country. The migration out of China led to dramatic shifts in the geographical spread of miners; specifically, a substantial move to the US and considerable resettling to countries with abundant energy in the East, such as Kazakhstan and Russia.

From a bird’s eye view, it appears that the concentration of mining activity among pools has generally decreased throughout Bitcoin’s history. There has been a wider variety of players involved, and an ever-changing ranking as to which solo miner or pool has the largest share. Moreover, the power of mining pools is likely to diminish even further in the future.

From this analysis, we find it hard to worry that mining pool centralisation poses any serious threat of a 51% attack, now or in the future. Obviously, there’s no way of knowing exactly what could happen if a set of pools constructed a well-engineered attack – however, this is not in their economic interest, and history clearly demonstrates that mining pools have very little power to exercise over Bitcoin itself.

Click here to read the full research article.