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This week marked the launch of Binance Pool, a mining platform powered by one of the largest cryptocurrency exchanges in the world. Coming less than a month after Binance CEO Changpeng Zhao confirmed rumors of this upcoming addition to his company’s product family born of an idea, the announcement paints the new mining pool as the bridge between “traditional mining and financial services.” The lowest fees on the market and seamless integration with a full suite of Binance’s financial products are the main strengths designed to attract miners.
The news has reinvigorated the debate about how big a crypto company can become before the community is justified in launching the dreaded “c-word” (centralization, that is). For Binance, criticism has increased in recent times.
Even before the mining pool was born, the company sparked controversy by extending its influence in the field of cryptographic data aggregation with the acquisition of one of the industry’s favorite token pricing hubs, CoinMarketCap. Furthermore, the newly published outline of Binance’s potential Smart Chain has sparked some sharp criticism in part for the alleged propensity to centralize its governance mechanism. Is Binance overstepping the line, getting too big for an industry founded on the vision of destroying centralized power structures?
Crypto exchanges meet mining pools
Gone are the days when crypto geeks could perform a profitable mining operation from their garage, using only a reused antiquated PC. The spikes in Bitcoin’s popularity and market capitalization pushed mining difficulties through the roof, first triggering the hardware arms race that had led to the triumph of application-specific ICs and thus making individual home mining entirely unsustainable.
To get at least a realistic view of a slice of the block’s rewards, miners were pushed to consolidate their computational power into pools, dividing the loot by individual hash rate contributions. In addition to the costs of hardware and electricity, some mining pools also charge fees for participation.
Cryptocurrency exchanges would have gained a lot from entering the mining scene, and so they did. The hallmark of an exchange-based pool, as explained on the Binance blog, is that “the rewards go directly to the participants’ trading accounts” rather than the wallets of individual miners, as in traditional mining pools. This seemingly trivial distinction makes a huge difference that can be summed up in one word: liquidity. Adam Traidman, CEO and co-founder of BRD, a global company specializing in blockchain-enabled financial services, told Cointelegraph:
“Aside from the obvious benefits, such as revenues and greater decentralization of mining, exchanges are entering mining [to generate] liquidity for market making. Relying on external miners and other sources for this has proved problematic in many cases due to the lack of adherence to existing liquidity contracts during times of hyper volatility. “
The first competitors among the big cryptocurrency exchanges – Huobi and OKEx – have done exceptionally well since the start of their respective forays into the mining pool business. Huobi Pool recorded a 547% increase in its operating revenues from 2018 to 2019, from $ 53 to $ 320 million. For OKEx Pool, it took three months from its launch in August 2019 to become the top five mining conglomerates by hash rate. At the time of writing, OKEx and Huobi Pools are ranked eighth and ninth respectively based on the blocks of Bitcoin found.
The Google of crypto land
Another reward that awaits big players who command huge audiences is the ability to get the most out of the user base by expanding the range of products offered within their ecosystem, which is the strategy that information technology companies most successful employ across the board.
Offering users a bundle of products allows tech companies to maintain horizontal growth even as they approach the roof in their respective primary markets. Encouraging existing customers to subscribe to adjacent apps and services in their ecosystem is great for maintaining and expanding a loyal customer base by offering them beneficial synergies and benefits.
Look no further than Google, which has Gmail, Youtube, Chrome, Maps, and a host of other widely popular services to complement its original value proposition, the web search engine. Every industry leader is committed to being what Google is to the Internet in general to their industry.
For a while, probably the only viable candidate for this distinction in the context of the digital assets space was Coinbase, a company that boasts both retail and professional crypto trading platforms, a wallet and custodian service. Conceived five years after Coinbase’s debut in 2012 – a handicap of eternal dimensions in the world of digital money – Binance seems determined to take a challenge.
Capturing a share of the mining pie is a logical step, as Richie Lai, co-founder of cryptocurrency exchange Bittrex, remarked to Cointelegraph: “Exchanges are looking for different ways to increase their business models, and mining is an adjacency. natural who trades might consider adding to their product portfolio. ” Alexander Blum, COO and co-founder of digital asset firm Two Prime, commented on Binance’s strategy:
“With a captive user base using Binance’s financial services, the mining pool simply offers an additional way to further monetize their audience. Note that Binance is not mining itself but, instead, is offering rental search software services at a 2.5% commission on mining rewards (after the 0% promotion expires in May). Compared to competing mining pools, the ability to offer loyalty promotions and a one-stop shop for trading, loan and savings accounts with a trusted brand will make this a competitive offering. “
Can there be an acquisition?
As the world’s largest cryptocurrency exchange by volume is entering the new industry, it proclaims an ambitious program of innovation, increased profitability for market participants, and decentralized hashing power distribution.
Speaking with Cointelegraph, Lisa He, the head of Binance Pool, shared a vision of the new platform where “retail and small-scale operations for institutional and professional miners” would benefit from a range of exchange-backed financial instruments. such as futures, options, savings, pooled loan and more. Commenting on concerns surrounding the potential centralization of mining power in the hands of Binance Pool, he argued that adding a major new player to the mix would have the opposite effect:
“By creating the Binance Pool, we aim to change the hash rate distribution across all the different mining pools, and we expect many users of competing mining pools to transfer their hash rate to our platform. This will result in more decentralization, not less “.
So, are the fears of centralization justifiable? Industry pundits Cointelegraph interviewed didn’t seem too worried. Neeraj Khandelwal, co-founder of India-based cryptocurrency exchange CoinDCX, noted:
“While it is true that the entry of large global exchanges into the mining sector will likely see them continue to dominate a portion of the BTC mining industry globally, I believe those concerns are potentially exaggerated. Binance entering space could actually have the effect of increasing the level of competition we see among BTC mining pools, reducing levels of centralization. “
Khandelwal explained that one or more dominant mining powers are unlikely to want to conspire and execute a 51% attack – even if they have the ability to do so – both because of the difficulty of such a collaboration and the fact that compromising the Bitcoin network in this way would amount to to shoot himself in the foot.
Traidman is also skeptical of the immediate risks of increasing centralization, as it would be irrational to attack the network: “The value of the assets on the chain would go almost to zero as it would be substantially invalidated. Thus, the risk of centralization due to a 51% attack is defeated. ”Blum commented with the same effect:
“Binance’s pool introduces a high level of competition that other mining pools will have to compete with through whatever mechanisms they have at their disposal. This will contribute to further decentralization of hash power in newer mining pools. “
Blum believes the continued growth of institutional miners will offer bullish momentum for the industry at large, as the capital-intensive activity of these collective projects, coupled with the imminent halving of block rewards, will drive Bitcoin prices up in so that miners can register a profit. Lai was also on board, saying, “I think the exchanges involved in mining Bitcoin can actually help with the threat of centralizing BTC.”
While the emergence of the Binance Pool can be seen as a healthy development that increases competition in the market in general, existing pools have a reason to become tense. The new player on the pitch will most likely pursue an aggressive expansion strategy. Lisa He made no secret of Binance Pool’s plans to eventually capture the dominant share of the hash rate:
“Our first goal is to become the leader in the mining pool industry, after which we will discuss what specific final market share we want to achieve. Right now, the industry leader has just over 21 EH / s and our goal for the next 18 months is to beat him. “
Keep your eyes open
In his recent interview with Cointelegraph, the CEO of Binance, CZ downplayed the narratives of his company getting too big. He credited the market processes and users who have chosen Binance’s products for the company’s explosive growth, noting that it is still very small compared to leading companies in the traditional tech industry.
While all of this may be true, there is no doubt that Binance is growing faster than any other leading cryptocurrency company in terms of revenue, user base and range of digital asset services on offer. Much of this will improve the overall quality of the global crypto user experience, but the community should also remain on the lookout for any potential scenario where established market power can become an issue. After all, the absence of a realistic 51% attack threat doesn’t mean there are no potential harmful effects at all.
After all, in highly innovative industries that fundamentally affect society, many negative externalities are difficult to predict. Who, in 2008, thought Facebook would become a prime spot for politically consequential disinformation or that Google would spawn a new media economy brand based on monetizing user attention?
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