Bitcoin hash rates threaten blockchain decentralization

The blockchain industry is facing a massive power imbalance — just like the traditional finance industry.

Blockchain technology was introduced in 2008 as a decentralized, secure, transparent system for managing digital transactions. Its primary aim was to provide a solution to major problems with traditional transactional systems, including trust, security, decentralization and efficiency. Blockchain has since expanded beyond finance and has been used in supply chain management, healthcare, games, digital media and social media, among others.

However, the blockchain industry is still facing significant challenges — such as a lack of diversity, wealth control by a few holders, hash rate problems and a loss of the promise of decentralization.

Hash rate and why it’s a problem

The cryptocurrency on everyone’s mind — and in the digital wallets of more than 400 million people around the world — is Bitcoin (BTC). Bitcoin’s hash rate is the computing power required to validate transactions and produce new blocks on the Bitcoin blockchain. A high hash rate is necessary to maintain the integrity of the Bitcoin network, but it also presents some significant challenges.

*Hash rate distribution among the largest mining pools for the six months ending April 25, 2023.*

One of the most pressing issues is the high energy consumption required to maintain a high hash rate. As more miners join the network, the hash rate increases — and so does the energy consumption required to sustain it. The environmental impact of BTC mining has led to concerns throughout Bitcoin’s volatile history and rise to mainstream fame.

Another challenge with Bitcoin’s hash rate is the centralization of mining power in a few large mining pools. As the hash rate has increased over time, it has become increasingly difficult for individual miners to compete with these large pools, leading to concerns about the potential for these pools to monopolize the network and control the direction of Bitcoin’s development.

There is also the potential for 51% attacks by mining pools that control the majority of the hash rate. If a single mining pool or a group of mining pools controls over 50% of the hash rate, they could potentially control the network and carry out malicious activities, such as double-spend attacks or rewriting transaction histories. This presents a significant threat to the security and integrity of the Bitcoin network.

Finally, the limited scalability of the Bitcoin network is another challenge associated with its hash rate. As more users join the network and the number of transactions increases, the network can become congested, leading to slow transaction times and high fees. This can limit its utility as a viable payment system and has led to ongoing debates within the Bitcoin community about how to address these scalability challenges.

Phantom decentralization comes in many forms

The blockchain industry has quickly fallen into a massive imbalance of power, mirroring the traditional finance industry. The concentration of wealth and power within a small group of individuals has created an industry that is far from decentralized. Those who were early adopters of blockchain technology, particularly Bitcoin, were able to accumulate large amounts of wealth through mining, investing and trading.

This has led to a concentration of wealth and power within a small group of individuals. The complexity of blockchain further limited early adoption to a minuscule percentage of people in the tech world. This concentration of power and wealth has made it difficult for new players to enter the market and challenge the dominance of established players.

*Bitcoin ownership concentration, 2021 v. 2023. Source: Glassnode*

The high barriers to entry have also contributed to the imbalance of power in the blockchain industry. The cost of setting up and running a successful blockchain project can be significant, and not everyone has the resources or expertise to do so. This has made it difficult for new startups to enter the market and challenge the dominance of established players.

Network effects also play a role in the imbalance of power in the blockchain industry. Blockchain networks rely on network effects, which means that the value of the network increases as more people use it. This creates a self-reinforcing cycle where established networks become increasingly dominant, making it harder for new networks to gain traction.

From phantom decentralization to the real thing

Despite the challenges facing the blockchain industry, there are ways to address these issues and create a more sustainable, equitable system.

One of the most pressing issues with Bitcoin’s hash rate is its high energy consumption. To address this, the industry could move toward using renewable energy sources, such as wind or solar power, to power mining operations. This would not only reduce the environmental impact of Bitcoin mining but also make it more sustainable in the long run.

To address the issue of limited scalability in the Bitcoin network, efforts should be made to improve the underlying technology. This could include the development of new protocols or the adoption of existing protocols, such as the Lightning Network, which could significantly improve the speed and efficiency of Bitcoin transactions.

Finally, greater efforts should be made to educate people about blockchain technology and its potential. This could be achieved by providing greater access to information and resources, offering training programs and workshops, and working with educational institutions to integrate blockchain into their curricula.

Alexa Karp is head of marketing at Lumerin and a former founding marketing manager at Metaplex. She is also an angel investor and adviser to more than 20 Web3 projects. She graduated with a BBA degree from Baruch College in New York.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.