Recent data from Diar demonstrates small mining pools increasing their percentage share of hash rate on the network as bitcoin mining remains competitive.
Quick take;
- Small mining pools have roughly doubled their share of hash rate compared to this time last year whereas the share controlled by mining pools associated with Bitmain has declined
- There are 40% less mining pools since the start of 2018 according to Diar but the hash rate and distribution of hash rate has improved over this timeframe
- Quantification of the distribution of hash rate classifies bitcoin mining as a competitive market
The percentage of blocks mined by smaller mining pools on the Bitcoin network has increased to 23-24% in recent months from 13-15% at the same time last year. This increase is being observed after “40% of the pools” shut down since the start of 2018 according to data analysis publication Diar.
A Bigger Share of a Bigger Hash Rate
Seven Day Moving Average of Hash Rate
Despite 40% of mining pools shutting down since the start of 2018, the amount of hash rate deployed on the Bitcoin network has more than tripled over the same timeframe. The increase in hash rate is at least partially attributable to the production of more powerful and efficient mining hardware since the start of 2018.
Bitmain Hash Rate Dwindling
At the same time, the percentage of blocks produced by mining pools associated with Bitmain has decreased from 51% last year to 36% this year. Bitmain owns mining pools AntPool and BTC.com and is also an investor in the mining pool ViaBTC.
Recent hash rate disclosures from Bitmain indicate that the hash rate share has further decreased since this data was put together. Bitmain reported an 88% decline in hash rate deployed on the Bitcoin network from April to May.
A More Secure and Distributed Network
Hash rate and the distribution of hash rate are key assessments for the strength of a network. Hash rate measures how much computing power is deployed on the network while the distribution of the hash rate indicates how vulnerable the network is to the collusion of a small number of mining entities.
The tripling of hash rate since the start of 2018 demonstrates more powerful hardware and/or more miners deployed on the Bitcoin network. The increase in the share of hash rate controlled by small mining pools has also resulted in a more distributed share of hash rate across the Bitcoin network.
The recent controversy of Binance seeking to coordinate a deep reorg on the Bitcoin blockchain highlighted how important smaller mining entities are for the Bitcoin network. Several analysts pointed out that even if a deep reorg were executed among major mining entities, smaller actors would play a pivotal role in incentivising mining to take play on the longest chain representing the most proof-of-work.
Analyst Chris Burniske proposed the Herfindahl-Hirschman Index (HHI) as a way to quantify the distribution of hash rate in a cryptocurrency network. HHI is commonly used to measure the concentration of businesses in mature industries.
It classifies marketplaces as competitive, moderately concentrated, or highly concentrated based on the distribution of competition. Based on the BTC.com estimated mining pool hash rate share over the past month, mining on the bitcoin network would be classified as a competitive marketplace.
However, if the BTC.com, AntPool, and ViaBTC mining pools are all considered to be one entity, it classifies mining as a moderately concentrated marketplace. This marks a greater distribution of hash rate from late 2017 when Bitmain related pools controlled 50% of the hash rate and the marketplace was classified as highly concentrated.
