Research Summary
The report examines the flow of funds between Bitcoin mining pools and miners, revealing hidden links between entities and assessing the degree of mining decentralization. It highlights the increasing centralization of power in Bitcoin mining, with the top two pools, Foundry and AntPool, receiving 53% of all mining rewards in 2023.
Key Takeaways
Centralization of Bitcoin Mining
- Increasing Centralization: The report reveals that the top two Bitcoin mining pools, Foundry and AntPool, received 53% of all mining rewards in 2023, indicating a growing centralization of power in the Bitcoin mining ecosystem.
- Overlap in Mining Pools: Some mining pools have observable overlap in 0-hop addresses, suggesting that they may be using the same software stack or coordinating more closely than it appears on the surface.
Flow of Funds to Exchanges
- Direct Withdrawals to Exchanges: Some miners withdraw earnings directly to an exchange address, with Binance, Kraken, and Coinbase among the top recipients of pool outflows, receiving nearly 21K BTC across the trio.
- Regional Alignment: There is a clear regional alignment between U.S.-based pools and U.S. exchanges, with Foundry making up 89% of the deposits to Coinbase, Kraken, and Gemini.
Consolidation of Funds
- Consolidation of Funds: The report identifies a single address, 3BH…WGb, that has received substantial contributions from multiple top mining pools, implying the existence of an entity backstopping multiple pool operations.
- Role of Loop Network: Given the accounting challenges associated with Full Pay Per Share (FPPS) payout model, it is likely that mining pools are leveraging Cobo’s Loop Network for liquidity and payout management, resulting in an increasing concentration of flows into a select number of Loop-affiliated addresses.
Concerns Over Mining Pool Centralization
- Centralization Concerns: Mining pool centralization remains a top concern in the Bitcoin community, with the overwhelming majority of mining rewards being funneled to just two pools, Foundry and AntPool, elevating risk factors like censorship and network disruption.
- Hidden Consolidation of Power: Though the remaining allocation of hashrate is relatively well-distributed among smaller pools, on-chain links between pool addresses point towards a hidden consolidation of power in the mining ecosystem.
Actionable Insights
- Monitor Mining Pool Centralization: Stakeholders should closely monitor the increasing centralization of Bitcoin mining, as it could elevate risk factors like censorship and network disruption.
- Assess Impact of Direct Withdrawals to Exchanges: The trend of miners withdrawing earnings directly to exchange addresses could have implications for the liquidity and volatility of Bitcoin. This warrants further investigation.
- Understand the Role of Loop Network: Given the increasing concentration of flows into Loop-affiliated addresses, stakeholders should seek to understand the role and influence of Cobo’s Loop Network in the Bitcoin mining ecosystem.
