Coinbase, Kraken and other cryptocurrency exchanges are taking positions on proof-of-work consensus and Bitcoin mining. .
Proof-of-work is one of Bitcoin’s core features which allows to reach consensus and keep the blockchain secure. Miners are responsible for finalizing transactions and generating new Bitcoins. However, proof-of-work isn’t perfect – to its critics, it’s a system that results in centralization of power.
Though there are alternatives, proof-of-work is here to stay as far as Bitcoin, Litecoin, Monero and many other cryptocurrencies are concerned. Proof-of-work largely operates behind the scenes, but it can have far-reaching effects — which has led some exchanges to weigh in on the matter.
Coinbase Endorses ASIC Mining
Coinbase has recently argued that proof-of-work networks can benefit from ASIC mining. This is a controversial claim — it’s widely held that ASICs bring about monopolized ownership because they are specially designed to mine certain coins. CPUs and GPUs, by contrast, are general purpose chips that are available to anyone who owns a computer.
However, Coinbase sees things differently. It argues that general purpose hardware is a greater threat to centralization. There are many GPUs and CPUs that are not being used for mining, and these could suddenly be harnessed to attack a mining network. ASIC devices, which are only useful for certain types of mining, can’t suddenly join a network en masse.
Coinbase adds that Bitcoin Gold, Vertcoin, and Verge have fallen victim to 51% attacks despite attempts to become ASIC-resistant. The company suggests that coins should bring about decentralization in a different way — they should instead turn to ASIC-friendly algorithms that support affordable manufacturing and turn ASICs into a widespread commodity.
Coinbase concludes that ASIC mining is inevitable: “Participants have to ask themselves if the industry is going to be secured by hobbyists running old laptops,” it insists. “Every at-scale, professional industry utilizes specialized equipment — it is naive to think that cryptocurrency mining will or should be any different.”
Kraken Argues Mining Pools Are Secure
Kraken has published its own in-depth report on mining mentioning centralizing effects of mining pools. At the time of its publishing in April, many people were concerned that a few major mining pools could coordinate a 51% attack due to their hashrate dominance. That fear has intermittently come and gone.
Kraken argues that there is little reason to fear such an attack. It believes that heavily invested miners cannot carry out an attack sustainably as the effects on market price would devalue any profits. “We believe there is a greater incentive for [pools] to conduct honest operations and uphold the value of the network,” Kraken says.
Citing rules of game theory, Kraken suggests that dishonesty is a poor strategy for miners: “Any deviation will certainly result in short-term cost with unpredictable compensation.” It also notes that pools don’t have guaranteed dominance —since users can switch between pools, new pools can form to deter collusion.
Other Exchanges Are Also Getting Involved
Some exchanges have attempted to get involved in mining more directly. Huobi, for example, runs a mining pool that accounts for 6% of Bitcoin’s hashrate, while OkEX runs a much smaller pool. Though they are not very significant, their existence does indicate that exchanges are interested in taking on big, Bitmain-owned mining pools.
BitMEX, meanwhile, is trying to keep mining security in check. It runs Forkmonitor.io which scans Bitcoin and its forks in real time for unusual activity. BitMEX Research also covers various mining-related issues, some of which are quite obscure and gain very little coverage elsewhere.
Finally, Binance has courted controversy by overstepping boundaries. After it suffered an attack in May, Binance briefly considered incentivizing miners to undo the theft. Binance eventually refrained from pursuing that plan — while miners showed no interest in complying. However, the event did raise the question of whether mining is truly irreversible.
Why Exchanges Care About Proof-of-Work
Exchanges typically have no direct influence over mining and proof-of-work. They can only suspend trading activity and block bad actors if an attack or vulnerability occurs. Coin developers are ultimately responsible for designing proof-of-work schemes that produce a decentralized, accessible, and secure mining network.
Instead, exchanges are concerned with mining because they adjust their services around each coin’s proof-of-work model. For example, Coinbase recently decided that it is safe to reduce its confirmation times for Bitcoin, Zcash, and Ethereum Classic. On the other hand, exchanges like Bittrex have delisted attack-prone coins entirely.
Some investors make decisions about which coins to invest in based on technical matters such as proof-of-work. Though exchanges are naturally concerned with market data, they often tend to keep investors informed about technical matters — a level of dedication to the public that often goes unnoticed.