China’s crackdown shows that industrial bitcoin mining is a problem for growth

Bitcoin’s reliance on large-scale mining infrastructure and geographic concentration has been mitigated by China’s recent mining crackdown. In May, China announced that it would become more difficult to mine and trade in cryptocurrencies to deal with financial risk. The country’s crackdown on cryptocurrencies is not new, but a repetition of previous rankings of the risks digital currencies pose to economic stability in the face of price fluctuations.

For the first time, cryptocurrency miners are being targeted to enforce existing guidelines. Mining hardware remains risky even if mining moves to other locations. This could prove that transforming the Ethereum blockchain into a proof-of-stake (PoS) that can be run on a consumer device is a more reliable way to decentralize and offer the opportunity to be more resilient to such risks.

Bitcoin (BTC) mining is based on large, industrial cryptocurrency mining farms and is mainly focused on China, which accounts for 65% of the world’s hash rate. Custom hardware manufacturing in China has supported this trend, with one of the two ASIC miners manufactured being sold to Chinese miners. The crackdown has caused significant disruption in the Bitcoin market.

The Bitcoin network’s hash rate has dropped to a 12-month low, and many provinces are telling miners to shut down. Uncertainty about what could happen to seized mining hardware has hit the entire network hard. This is a huge loss to an industry worth billions of dollars to Chinese miners.

China’s political stance on Bitcoin is in search of “financial stability and social order” and may be the result of geopolitical interests related to the desire to eliminate competitors with their national digital currency, the digital yuan, in addition to the stated goals of reduction CO2 emissions and the diversion of energy to other industries. The quick crackdown has shown that Bitcoin’s reliance on industrial-scale mining farms, hardware, and power supply chains – all of which are dependent on government policies – can be Achilles’ heel.

Miners are currently looking for cooler climates, cheap energy, and “crypto-friendly” jurisdictions. This could open healthy competition for crypto-friendly political positions in other jurisdictions to attract industry participants – for example, we’ve seen Wyoming decentralized autonomous organizations and cryptocurrencies’ application of law generally friendly. However, it remains unclear whether hardware migration will keep them out of the limelight of political crackdowns.

Have we already decentralized?

Hardware has always been a big hole in decentralized infrastructure. In blockchain-based cryptocurrency networks that run on a proof-of-work (PoW) consensus algorithm such as Bitcoin, the transaction record is often agreed against a distributed network of computers.

This is very vulnerable to structured mining which involves centralizing hardware mining in industrial factories in certain regions (like China), “premium” cryptocurrencies, etc., with updated hardware not yet available for the broader market (e.g. ASICs) or delays in the supply chain.

The concentration of much of the hash power in one country, dependent on expensive hardware setups and regulatory repression, is in contrast to Bitcoin’s “decentralized” ethos, as outlined by Satoshi Nakamoto. The original vision of Bitcoin in his whitepaper was a peer-to-peer system where the infrastructure could be run by individuals on a general purpose computer (via CPU mining) so that the entire network could not be closed. by targeting a point of failure.

This could also show why the move from Ethereum to PoS consensus is important – and why it has the potential to become more trustworthy and decentralized in the long run. Attacking a PoS network costs more time and money than it costs to rent or buy hardware to attack a PoW blockchain, as the attacker’s coins can be automatically “slashed”.

Additionally, running a PoS validator node on a laptop is less noticeable than running a large-scale hardware mining operation. If someone can run a node from anywhere with consumer-grade devices, more people can participate in validating the network, making it more decentralized and administrators finding it almost impossible to stop people from running nodes. In contrast, the huge energy-consuming assets found while mining Bitcoin are much easier to target.

What’s wrong with the hardware?

Mining is ongoing and miners are relocating their hardware to neighboring regions, including Kazakhstan and Russia. Several crypto-friendly jurisdictions – like Texas, which provides corporate legal clarity – are racing to recruit miners. Hardware is also sold with logistics companies report Thousands of pounds of mining equipment shipped for sale in the United States.

While China’s policies have caused some fear, uncertainty and doubt in the marketplace, they can help remove structural flaws from the network, which is why some Bitcoin proponents have welcomed the crackdown. The goal here for Bitcoiners is long-term decentralization. Hardware migration, however, is not the same as further decentralization of the network and the elimination of vulnerabilities for regulatory interventions against miners.

Migrate hardware vs. remove vulnerabilities

Hardware is a problem in decentralized networks. Bitcoin’s need for large-scale infrastructure has made it vulnerable to the politics and politics of countries like China. Even if mining moves elsewhere, it may not be decentralized, which means it could be as threatened in other jurisdictions as software-based PoS networks can run beyond, a standard laptop probably isn’t.

Connected: Shooting the Future: Is the Falling Bitcoin Hash Rate an Opportunity for Disguise?

These events show the interdependence of blockchains with nation-state interests and politics. How jurisdictions react to the opportunity to attract hardware mining and how they approach blockchains moving to PoS will have a significant impact on the structure and risks of blockchain networks in the future.

Kelsie Nabben is a researcher at the RMIT Blockchain Innovation Center and Ph. Candidate for the Center for Digital Ethnology Studies at RMIT University. She is also a board member of Blockchain Australia.