Will the success of Bitcoin lead to its downfall?
With the upcoming fourth Bitcoin (BTC) halving approaching, there are concerns among experts about the potential risks of centralization that could threaten the blockchain network.
The halving event occurs every four years, reducing the block reward for Bitcoin miners in order to maintain its scarcity. In the past, miners have continued to operate and even increased in number due to the rising BTC price following previous compensation cuts.
However, there are doubts about whether the current BTC price is high enough to sustain miners and prevent centralization risks following the fourth halving event.
Lani Dizon, co-founder of Ryo Coin, acknowledges that market dynamics can change and unforeseen events can have a significant impact. While some miners may find the reduced block reward challenging, especially if the price does not immediately or sufficiently increase to offset the reduction in rewards, Dizon believes that the Bitcoin network is designed to adapt.
One of the main concerns regarding the centralization of Bitcoin is the compensation of miners who help keep the network operational. As the block reward is reduced by 50% in the upcoming halving, from 6.25 BTC to 3.125 BTC, the high price volatility of Bitcoin could make it difficult for individual miners to be adequately compensated for operating their nodes under challenging conditions.
Historically, the BTC price has reached new all-time highs a year or 18 months after each halving event. For example, after the first halving in November 2012, Bitcoin’s price surged from $12.35 to $964 a year later. Similarly, after the second halving in July 2016, the price increased from $663 to $2,500 in about one year. Following the third halving in May 2020, BTC was trading at around $8,500 and reached almost $69,000 in just 17 months.
According to Lucian Calin, a data center technician at Argo Blockchain, some miners who are over-leveraged may not survive the halving due to high overhead costs or significant debt. However, Calin believes that the situation will eventually balance out.
Halving Bitcoin’s block reward could put a strain on small-scale and individual miners due to the high costs associated with mining. This could lead to smaller miners exiting the market if they lack sufficient resources, potentially favoring larger mining companies and increasing the risk of centralization.
The centralization of Bitcoin poses a significant threat to the global financial system, as evidenced by the over $11.2 billion in total net flows registered by BTC exchange-traded funds (ETFs). This centralization could potentially expose the Bitcoin network to a 51% attack and allow a single entity to have full control over the blockchain. Currently, the Foundry USA Pool controls 27% of the total Bitcoin hashrate, followed by AntPool with 23.8% of the total network hashrate.
However, Lani Dizon argues that Bitcoin’s decentralized nature is designed to prevent any single entity from taking control. The network relies on a proof-of-work (PoW) consensus mechanism, where miners compete to validate transactions and secure the network.
Lucian Calin suggests that with the current ETF from BlackRock and other big institutions, there is a possibility of them trying to centralize Bitcoin. However, Calin believes that they cannot monopolize Bitcoin without driving its price to “millions of dollars” since there is a limited number of coins available on exchanges.
A report from Bitfinex crypto exchange suggests that the forthcoming Bitcoin halving could lead to the centralization of BTC mining power, which goes against the ethos of Bitcoin. The U.S. alone holds a 37.84% share of the total BTC hash rate, indicating a significant concentration of mining power.
Despite concerns about centralization, the global distribution of miners and their ability to adapt mitigate the risk, ensuring that the Bitcoin network remains decentralized. Christopher James Crowell, a Bitcoin miner and the director of business development at Canaan, believes that Bitcoin mining is a global phenomenon that cannot be controlled by a central entity.
In the event that Bitcoin becomes centralized, experts have differing opinions on how governments would react. Dizon suggests that governments would view it as a significant threat to financial stability and may take regulatory actions to address the concentration of power. However, Calin believes that governments would be limited in their actions due to the international nature of Bitcoin.
In conclusion, as the fourth Bitcoin halving approaches, concerns about centralization risks are being raised. The impact of the halving on miners’ compensation and the potential for increased centralization pose threats to the blockchain network. However, Bitcoin’s decentralized nature and global distribution of miners provide some assurance against complete centralization. Governments may also take regulatory actions to mitigate the concentration of power if centralization becomes a significant issue.
