Some claim that Bitcoin mining is doomed to be concentrated in the hands of a few large mining corporations, and that the advent of ASIC mining is the culprit.

I disagree.

Well, I don’t know for a fact that this will not happen. However there are several factors in play that could prevent this scenario – a scenario which is undesirable, because the more centralized mining is, the more likely it is that a majority of hashrate would collude in an attack against the Bitcoin network.

 

The cited reason for centralization is that large companies enjoy economies of scale in mining. These companies, combined, will scale up their operation until the difficulty has risen so much that mining is only marginally profitable. Since hobbyist miners are presumably less efficient, at that point mining will be a loss to hobbyist miners, so they will be forced out of the market.

An analogy is sometime given with gold mining. Unlike the old days of the California gold rush, it is no longer possible for individuals to mine gold. Gold is only abundant in specific locations, and requires a complex mining operation to extract. The barrier of entry to obtaining suitable land and setting up a mine is just too high.

However, the situation with Bitcoin is much different, because of its extremely parallel nature. A gold mine will no longer work if you build a miniature version of it, so a person cannot run a small gold mine at home. In contrast, a Bitcoin mining farm is basically a huge number of copies of a single unit doing a very simple computation. Even a small chip measuring an inch across would be composed of many such units. So mining can definitely be scaled down to a level where everyone can run a Bitcoin miner at home. My first contention is that, since a large farm is basically multiple instances of a basic unit, the economies of scale that can be obtained are fairly limited.

This refers to the operation of the devices. There is still a big barrier of entry to actually manufacturing the devices; however, I do not see this as much cause for concern. Because Bitcoin mining requires a single, simple computation, designing ASIC to carry it out will require relatively little R&D costs, when compared with more complex circuits such as CPUs and GPUs. Because of this we should expect many manufacturers of such chips, enough to ensure one would cater to the hobbyist market – if they are willing to pay for it.

Assuming an equilibrium where the potential mining revenue is mostly known, what anyone – whether a professional entity or a profit-seeking hobbyist – would pay for a device, is the profit he expects to receive from it in its lifetime. And since the revenue is essentially the same for all, what differs is the cost of operation. For there to be a significant hobbyist market, there just need to be enough hobbyist with cost of operation lower than that of the large corporations.

 

One thing going for the hobbyists is that they may have existing, underutilized infrastructure that can be leveraged into supporting a mining operation. A large-scale company would need to set up an infrastructure specifically for its operation, while a hobbyist may have unused physical space in his residence, a power grid connection with spare capacity, or a computing device he could use to assign work to the mining devices. For example, if he is using a desktop computer (unlike some, I don’t foresee the death of those anytime soon), he may have a spare PCI express slot to which he could plug a card, feeding off the spare capacity of the PSU (it may be also possible to design it to run only when the other power-hungry components are idle, which is most of the time).

But much more importantly, It can be expected that in the long term, the major cost of mining will not be capital expenditure, but power. Therefore, anyone who can get cheaper power will have a huge advantage. A hobbyist might have an arrangement of getting free electricity from his host, effectively “leeching” power from someone else – this practice may be frowned upon, but it will happen, and only at small scale. But the crux is hobbyists living in colder countries, who would otherwise use a resistive space heater to warm up (less so, those who would use heat pumps or furnaces). Any power spent on a mining device is exactly deducted from what they would have to spend on their space heater, so for them the power really is free.

Many other factors are in play – mining is inherently risky, and hobbyists might be less averse to this risk than professionals, or maybe some of them will have a relatively higher estimation of expected profit. Hobbyists might have reasons to mine other than direct profit, which could also tip the scale in their favor.

Even if there are not enough hobbyists with favorable conditions, we should also consider professional companies large enough to enjoy some economy of scale, yet small enough to be more lean and efficient than the large companies. And again, if these companies are in the market for mining devices, some manufacturer will take their money. Many such companies can fit in the global Bitcoin mining market, and while this is not the same as the ideal decentralized vision, it is still a good approximation.

 

In light of all of this, I do not worry that the economics of obtaining and operating mining equipment will be a cause for harmful centralization of mining.