Chainalysis: Market Power of Mining Pools
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley), Author: Chainalysis, translation: Ziming, reproduced by Odaily with authorization.
Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
Crypto Valley Live (ID: cryptovalley)
, Author: Chainalysis, translation: Ziming, reproduced by Odaily with authorization.
Miners are an integral part of the digital asset market. Their competition validates BTC transactions, and their mining proceeds are the source of the BTC sold. Now, BTC mining is mainly carried out through professional mining pools, which allows miners to jointly deploy resources.
By early 2020, the number of mining pools had been reduced to 11. However, no mining pool can control the absolute hash rate, and compared with 2017 and 2018, the competition between the top mining pools in 2019 has become more intense, which also shows that the BTC network is still safe.
In 2019, mining pools provided 28% of BTC flowing into exchanges and not from other exchanges, making them the most important and reliable source of non-exchange BTC for exchanges.
In 2019, mining pools sent 700,000 BTC to all exchanges, with 10 major exchanges receiving 77% of it. The exchange that mainly accepts BTC is Huobi, accounting for 29%; followed by OKEx, accounting for 12%. In addition to these two exchanges, there also appears to be competition among exchanges for BTC from mining pools.
A series of jobs make miners an integral part of the digital asset market. Their competition verifies the permanence of BTC transactions and prevents double spending. This replaces the need for transactions to have to go through a central authority, and they are the source of new BTC that will be sold. This raises questions about miners' power. How fierce is the competition among miners, and how does new BTC enter the market?
Using data from Chainalysis, we can answer these questions quantitatively. A mining pool that coordinates the resources of individual miners is the key to this answer. Mining pools dominate BTC mining, but there is huge competition among mining pools. This shows that the web is and will be safe in the future.
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The rise of mining pools
Now BTC mining is mainly carried out through professional mining pools. Before 2012, BTC was mined mostly by anonymous people. This changed in 2013, and most mining activity was done through mining pools. Mining pools allow individual miners to collectively deploy their resources to mine BTC more frequently in the pool and share the rewards. Mining pools can also provide cloud mining services, where customers pay for mining on their own behalf.
As the use of dedicated ASIC miners continues to increase, so does the migration of independent miners to mining pools. Without ASICs, mining would be impossible and the price would go from tens to hundreds of dollars per BTC. In 2019, well-known mining pools received 92% of mining rewards, which is the lowest level since 2016, which indicates that some miners have recently started to mine independently, or that mining pools are looking for greater privacy.
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By early 2020, the number of prominent BTC mining pools had dropped to 11 from a peak of 30 in March 2017. This drop in volume coincides with a period in the first quarter of 2019 when BTC prices were relatively low and the total hash rate doubled. Lower fiat currency rewards and increased resources required to earn rewards may have led to consolidation of mining resources.
Having a small number of pools increases the risk that a single pool can control a share of the hash rate, allowing that pool to disrupt the entire network. However, at no time since 2016 has the largest mining pool accounted for more than 33% of the total hash rate, and in 2019 the largest mining pool accounted for 16.8% of the total hash rate, closely followed by After the second and third largest mining pools, the hash rate accounted for 12.9% and 12.8%, respectively. This suggests that miners have distributed their hashrate among pools so that there is no dominant pool in terms of hashrate, although the top four pools do control the majority of hashrate.
Compared with 2017 and 2018, the competition among the top mining pools in 2019 is more intense. In the whole year of 2019, on average, the largest mining pool only stayed in the first place for 4 months, and it rotated with other mining pools such as BTC.COM, F2Pool, and Poolin in the top four positions , and in comparison, the largest mining pools in 2017, such as Antpool.com and BTC.com, stayed in their corresponding rankings for a whole year. The competition for the mining pools outside the top two is always very fierce, and their rankings will rise and fall every one or two months.
Therefore, although there are relatively few mining pools, no one mining pool dominates, and there is strong competition among them. This also shows that BTC transactions are currently intact and undisturbed. It also reveals an important aspect of decentralization, which is centralization with certain incentive properties. For example, miners can increase their total rewards by joining a mining pool. However, the BTC protocol is open, which means that miners can switch mining pools, so centralization does not mean centralization of rights. That said, the power of mining decisions can be centralized in other ways: mining pools can cooperate properly; Bitmain produces most of the mining hardware. Further research is needed to understand how centralized miners' hashrate is, not just how centralized they are joining mining pools.
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What is the role of the new inflow of BTC in the market
In addition to their role of validating BTC transactions, miners are also a key source of new BTC. Since 2018, miners have received a total of $12.3 billion worth of BTC at the time of mining, 94% of which came from mining pools.
Mining pools do not hold BTC for long after receiving it. Since 2017, the longest average time mining pools have held BTC is 67 days. This peak occurred in July 2018, as mining pools held BTC for a long time after the price rebounded in late 2017. As prices fell after July 2018, mining pools sent out the BTC they had been holding, even as prices rose, a trend that continued even as BTC prices increased in 2019. This shows two things: first, mining pools are allocating more and more BTC to miners; and second, their own BTC inventory levels are low and not growing.
The main reason mining pools and miners can’t hold their BTC for long is that they need to sell their BTC for fiat currency to cover costs like the electricity needed to mine. So miners send their BTC to exchanges, or to brokers, who usually sell it on exchanges for fiat currency.
Almost 90% of all BTC flowing into exchanges originates from other exchanges as traders seek to capture arbitrage opportunities. But this just moves BTC between different markets, it doesn't change the total amount of BTC available for buying and selling, so it doesn't fundamentally affect the price.
Conversely, when miners send BTC to exchanges, they are also injecting liquidity into the market. This increases the supply of BTC in the market, which may lower the BTC price. In addition to BTC obtained from other exchanges, mining pools are the most important source of BTC inflows to exchanges, followed by custodial wallets and commerce services. Since 2017, 28% of the BTC received by exchanges from the service has come from mining pools (excluding other exchange inflows).
However, mining pools are not the only source of new BTC entering the market. Because there are more BTC held in personal wallets for investment than there are BTC to be mined. Therefore, if the BTC used for investment flows into the exchange, then the market liquidity may increase significantly. The BTC price drop in mid-March 2020 seems to fit this scenario. This type of BTC can also make up for the loss of available BTC due to the BTC halving, which will reduce the reward for digging a new block from 12.5 BTC to 6.25 BTC.
When we identify the BTC flowing to the exchange, we will determine the final service end (such as a mining pool) where the value of the BTC comes from. Value may have been (and most of the time is passed through) intermediate addresses between servers, rather than being transferred directly from one server to another through a direct transfer. These intermediate addresses are often controlled by unknown private entities, such as miners who receive BTC from mining pools and then send to exchanges, or send to exchange OTC brokers. That is, we look at an exchange's indirect exposure to mining pools via any number of transfers between unknown entities such as miners or brokers, as opposed to direct exposure, which provides insight into the overall network market Provides a more comprehensive view of the health of the
As a whole, mining pools sent BTC to 415 different exchanges in 2019, with only 2 mining pools exclusively sending to one exchange. Although there are many exchanges receiving BTC, the 10 major exchanges received 77% of the 700,000 BTC mined by mining pools in 2019. Huobi is the main recipient with 29%, followed by OKEx with 12%.
However, with the exception of Huobi, which has remained number one throughout 2019 and has often been the main destination for new BTC inflows, it appears that competition among other exchanges vying for BTC will be more intense. Except for the top few exchanges, few other exchanges are able to maintain their rankings stably. 2017 was a particularly turbulent year for the exchange rankings. Miners send BTC to Korean exchanges seeking to profit from their high-priced BTC. The popularity of OKEx soared this year, and although BTCC was closed, miners ushered in another exchange—Binance.
Since mining pools require fiat currency to pay fees, the dominance of China-linked exchanges such as Huobi and OKEx provides evidence that miners are primarily based in China. From these exchanges, exchanging BTC to Chinese Yuan is convenient (although it cannot be done directly). This also shows that these exchanges are the main liquidity providers in the BTC market, as they often supply new BTC.
However, the level of competition beyond the top two exchanges also suggests that other exchanges are eager to attract the liquidity that new BTC brings, so they may actively seek to cooperate with miners. When the price of BTC on exchanges continues to rise, miners also seem to take advantage of that arbitrage opportunity, as happened previously in South Korea.
Mining is often seen as the mystical power of digital currencies, perhaps because it is a quality unique to this type of asset. However, as this report demonstrates, BTC mining also appears to be a reasonable behavior because miners make decisions that maximize their returns in the face of competition, and as Satoshi Nakamoto designed, Doing so will ensure the security of the network.
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Multi-currency mining
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