Bitcoin Mining Centralization: Is Stratum V2 the Solution?

Experts weigh in on the risks of mining power concentration and how the new communication protocol could eliminate concerns about censorship and 51% attacks.

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Concerns about the power concentration of Bitcoin mining have always been a source of debate.

With China’s ban, many players in this activity migrated to other countries. A few years later, a single mining pool already reaches 34% of the network hashrate, which probabilistically allows it to mine 1 out of every 3 Bitcoin blocks.

We know what the solution is and its name is Stratum V2,” thinks bitcoiner discloser Federico Rivi, who writes for Bitcoin Magazine and relied on the arguments provided during an interview by Gabriele Vernetti, founder of BitPolito and Bitcoin mining specialist.

Risks of Bitcoin mining centralization

The concentration of Bitcoin mining power poses two fundamental problems.

The first is censorship of transactions by the pool, given that whoever manages the pool is the one who includes transactions in the block, while miners contribute computational power with their mining farms.

The second is and the possibility of a 51% attack.

For Vernetti, transaction censorship is technically possible, however “the longer the censorship lasts the more time miners will have to realize it and switch their activity to another pool”.

The reason has to do with the fact that censorship could affect the commissions miners receive. “The risk of censorship seems to be minimal,” concludes Rivi.

In fact, there was already a similar precedent in 2021, when the mining pool MARA Pool, owned by Marathon, began excluding transactions included in an OFAC blacklist of Bitcoin addresses.

The consequence of this was immediate, Rivi explains. Miners began migrating to other pools and MARA Pool had to change its mind about that strategy.

According to Vernetti, a 51% attack by a pool would meet a similar fate. For example, if a denial-of-service attack were attempted, mining empty blocks, miners would immediately perceive the attack on the Bitcoin blockchain.

At this point, specialists wonder whether it would be possible that a mining pool such as Foundry, which operates under U.S. law, could be coerced by this state or its government to censor Bitcoin transactions.

After [a 51% attack], immediately, miners would redirect their hashrate to other pools. This is because, without transaction fees, each miner would receive less money for their work. Miners would have a direct incentive to provide hashrate to another group, an operation that takes only a minute.

If Foundry USA started mining empty blocks, in my opinion, it would lose half the hashrate it coordinates in an hour.

Foundry, a pool run by venture capital firm Digital Currency Group, currently concentrates more than 30% of the hashrate. In his argument, Vernetti used another example, that of a double-spending attack.

On a technical level, one could try to double spend even with a lower hashrate, but again, what would be the reason?

Because it is true that Foundry USA is seen as a US-controlled institutional group, but it is still a business. Their economic interest is to make the network work as well as possible.

Double spending would undermine Bitcoin’s status as an immutable network and I imagine could cause its price to collapse immediately.

The counter-incentive would consist of perhaps $1 billion paid by the U.S. to carry out such an attack.

The solution, Stratum V2

Both the risk of censorship and the risk of a 51% attack by a mining pool are eliminated with Stratum V2, analysts believe.

Stratum V2 is a communication protocol between miners and mining pools, it allows Bitcoin miners to have the power to build their own transaction blocks, taking responsibility for this task, which with Stratum V1 falls solely on the pool.

Bitcoin Mining Centralization: Is Stratum V2 the Solution?

Among the more than 15 benefits Stratum V2 brings to Bitcoin mining, two stand out according to Vernetti: security and performance.

Because Stratum V2 is a protocol that encrypts information, a hacker who sought to interfere with the communication between the miner and the pool would not stand a chance.

With Stratum V1, it is possible to usurp a miner’s identity by making the mining pool believe that a certain proof of work was performed by him, instructing the pool to collect the proceeds instead of the miner. According to Vernetti, this should be an incentive for Stratum V2 adoption, because it would attract miners.

Because with Stratum V2 the communication between the pool and the miners is executed in binary code, rather than human-readable ASCII, character conversion time is saved and more packets of information are transmitted in a given period of time.

“This is important because being able to provide more proofs of work can be decisive in winning the race to write the block. Improved performance is a competitive advantage,” concludes Vernetti.

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