Binance’s mining pool could upset the entire mining industry

Binance has launched its own mining pool. This could mean bad news for miners, but probably not for the reason you are thinking. We are all aware that Binance is continuing to extend its reach across the industry. The exchange’s purchase of CoinMarketCap for around $ 400 million was a bold step to grab attention at the top of the crypto funnel, and its recent foray into mining just before the 2020 halving shows that Binance is also interested in having influence at source.

By all accounts, the corporate culture at Binance seems to be one of innovation and experimentation. CEO Changpeng Zhao is known for being approachable and when the good ideas come from within the company, he is able to exercise his huge user base and war chest to enter new markets.

The question is, what impact will the Binance pool have on the miners themselves?

For starters, the impact may be minimal. Binance’s initial target market will be miners currently mining through the pools of other Chinese exchanges, such as Huobi and OKEx. There is stiff competition between these exchanges and Binance launching a pool can be seen through this lens. Binance even recruited directly from Huobi and Bitmain to build their pool’s business development team.

It’s still in its infancy, but the shift in global hashrate distribution since Binance launched its pool tells the same story. Both Huobi and OKEx lost a couple of percentage points of share in the global hashrate. OKExPool and Huobi dropped from 6.74% and 5.92% in April 2020 to 4.5% and 4.0% in early May, respectively, while Binance attracted 4.5% of the hashrate of the network since launch.

Meanwhile, established mining pools like F2Pool and SlushPool have seen a growth in their hashrate share during the same period.

Until now, Huobi and OKEx have predominantly used their pools as a way to attract exchange clients and support the services already offered. While older pools compete differently.

Exchanges have huge reserves of Bitcoin and other liquid assets. They can trade at a loss or close to cost for long periods of time.

SlushPool’s Edward Evenson and Luxor’s Ethan Vera recently discussed this short-term advantage on the mining-focused HASHR8 podcast. They speculated that Binance’s pool will be used as a loss leader because it can afford to push prices into the ground. As Edward Evenson, director of business development at SlushPool said:

“When you have 80,000 BTC in reserve, it becomes quite easy to do what you want, especially when you are vertically integrated into a group of different sectors of the industry.”

Another reason Binance might focus on the Chinese mining market is that most of their team, base, and connections are still mostly in China. It also has good business sense: 65% to 70% of the global hashrate is in China.

My concerns in this regard are not the typical narratives of excessive centralization in China, as recently expressed by Philip Salter of Genesis Mining. In fact, as with the lessons everyone can learn from how Genesis handled their customer hashrates during the bear market of 2018, it’s far more important to focus on how you treat miners than where your company is based.

I am of a similar opinion to my Australian colleague, Thomas Heller – F2Pool’s global commercial director – who also took part in the debate on the HASHR8 podcast. He pointed out:

“The people who launched Bitcoin companies in Asia, such as pools or producers, are Bitcoiners. They are no different from Bitcoiners in Europe, North America or elsewhere. “

Bitcoin mining is the real threat

Centralization is not a direct function of geographic location. Bitcoin does not have a nationality and neither do pools need to be labeled in this way. In addition to the increased development of farms in North America, large mining operators own and operate machines in China, Russia, Kazakhstan, and anywhere else with an abundance of low-cost power, no matter where the operators call home.

Fundamental risks in China are beyond the control of Bitcoiners and it makes sense that anyone who wants to profit from Bitcoin’s contribution to security seeks to find ways not to depend on single points of failure. Economic factors such as the proliferation of hardware manufacturers and the logistical benefits of mining without having to export the machines to the other side of the world will continue to support a disproportionate level of mining in that region.

Bitcoin mining is a permissionless antifragile system where the barriers to entry are cheap electricity and access to efficient hardware.

The future success of SBI’s focus on providing hardware for large North American mining operations, or the potential entry of even better-equipped manufacturers like Samsung could change the mining landscape quite quickly. While electricity prices are low in China now due to the long rainy season, not even they can compete with some of the opportunities explored by the likes of Layer One, Peter Theil-backed Texan or Greenidge Generation in New York.

So the threat Binance poses is not geographic. The real threat is whether this crypto behemoth will drag down the circular economy that currently exists for established pools. SlushPool is the oldest pool and spends most of its resources in developing proposals such as Stratum V2. F2Pool had a strong voice in SegWit 2x debates, and history suggests that its founders came from the right side of the argument. These types of pools make their profits by building a reputation and experience in Bitcoin mining.

The real risk is that Binance turns mining into a short-term game where the only rules are how low you can offer commissions. What will be the consequence if pools that focus on the long-term success of their miners are eliminated? As with everything in the beautiful game that Satoshi has created: the market will decide.

The views, thoughts and opinions expressed herein are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.