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Binance Pool’s entry into mining raises concerns about possible centralization

May 5, 2020

This week the 1stStart Binance Pool, a mining platform operated by one of the world’s largest cryptocurrency exchanges. Just a month until Changpeng Zhao, the CEO of Binance, will confirm Rumors of this upcoming expansion of your company’s product family, the announcement presents the new mining pool as a bridge between “traditional mining and financial services”. The lowest rates on the market and seamless integration with a full set of Binance financial products are the main selling points for mining.

The news sparked debate over how big a crypto business can be before the community deems it justifiable to start the dreaded “word with c” (centralization). For Binance, criticism has increased lately.

Even before the mining pool started, the company sparked controversy by expanding its impact on crypto data aggregation and acquiring one of the industry’s most popular token price centers, CoinMarketCap. In addition, the recently published design by Binances Smart Chain has been heavily criticized, among other things for its alleged tendency to centralize its governance mechanism. ¿There is Binance Crossing the line, too big for an industry based on the vision of destroying centralized power structures?

Cryptocurrency exchange meets mining pools

Binance Pool’s entry into mining raises concerns about possible centralizationBinance Pool’s entry into mining raises concerns about possible centralization

Gone are the days when geeky cryptocurrency enthusiasts could do lucrative mining from their own garage with just an outdated PC. Bitcoin’s popularity and market capitalization have caused mining difficulties to skyrocket. First, the hardware boom that triggered the triumph of application specific integrated circuits or ASICs was triggered, and then the individual home mining was almost unsustainable.

To have at least a realistic chance of earning part of the block rewards, miners had to group their computing power into groups or pools and distribute the loot based on individual contributions to the hash rate. In addition to hardware and electricity costs, some mining pools also charge participation fees.

The exchange of cryptocurrencies benefited greatly from working with mining, and they did. The distinguishing feature of an Exchange pool, as explained on the Binance blog, is as follows: “The rewards go directly to the accounts of the participants in the exchange“Instead of going into every miner’s wallet like in traditional mining pools. This seemingly trivial distinction marks a world full of differences that can be summed up in one word: liquidity. Adam Traidman, CEO and co-founder of FRG, on financial services in blockchain – Area specialized global companies told Cointelegraph:

“Aside from the obvious benefits, such as revenue and increasing decentralization of mining, the stock exchanges go into mining to generate liquidity for the creation of markets.” In many cases, relying on external miners and other sources has proven to be problematic because, in times of high volatility, existing liquidity contracts have not been met. “

The first renowned crypto exchanges to participate – Huobi and OKEx – have had exceptional successes since they began their forays into the mining pool business. Huobi Pool saw a 547% increase in operating income from $ 53 million to $ 320 million in 2018-2019. OKEx Pool has taken three months from its launch in August 2019 to reach the five largest mining conglomerates by hash rate. At the time of going to print, the OKEx and Huobi pools were eighth and ninth respectively for mined Bitcoin blocks.

The “Google” of the crypto ball

Another reward that awaits the great players who appeal to a mass audience is the possibility to use the user base optimally, At the same time, the product range within the ecosystem is expandedThis is the strategy of the most successful information technology companies in all areas.

Offering a product package to users enables the technology powers to maintain horizontal growth even as they near the top of their respective primary markets. Encouraging existing customers to subscribe to neighboring applications and services in your ecosystem is ideal for maintaining and expanding a loyal customer base while offering synergies and practical benefits.

Take a look at the case of Google, which has Gmail, Youtube, Chrome, Maps, and a host of other widespread services to complement the original value proposition, the web search engine. Every industry leader strives to be what Google is for the Internet in general for its respective sector.

You could say that for a while the only viable candidate for this distinction in the context of digital asset space was Coinbase, a company that offers cryptocurrency trading platforms for retailers and professionals, a wallet and a custody service. Binance was designed five years after Coinbase’s debut in 2012 – an infinite disadvantage in the world of digital money – and seems determined to take on a challenge.

Capturing some of the mining audience is a logical step, Richie Lai, co-founder of Bittrex cryptocurrency exchange, told Cointelegraph: “The exchanges are testing various ways to improve their business models, and mining is a natural neighborhood that the exchanges may consider expanding their product portfolio.Alexander Blum, chief operating officer and co-founder of digital asset company Two Prime, commented on Binance’s strategy:

“With a loyal user base that leverages Binance’s financial services, The mining pool is just an additional way to monetize your audience. Note that Binance does not dismantle itself, but instead offers rental search software services at a price of 2.5% of the mining rewards (after the 0% sale ends in May). Compared to competing mining pools, the ability to offer loyalty promotions and a one-stop shop for trading, credit, and savings accounts with a trusted brand will make this offer a competitive offer. “

Can a conquest be achieved?

With the entry of the world’s largest volume cryptocurrency exchange in the new sector, an ambitious innovation program, higher profitability for market participants and a decentralization of hash power distribution are announced.

In conversation with Cointelegraph, Lisa He, director of Binance Pool, shared a vision for the new platform, on which “Retail and small businesses for institutional and professional miners alike would benefit from a range of exchange-based financial instruments such as futures, options, savings, group loans and more. Commenting on concerns about the possible centralization of mining power in the hands of Binance Pool, he argued that including a new key player in the mix would have the opposite effect:

“With the creation of the Binance Pool, we intend to change the hash rate distribution across all of the different mining pools and hope that many competing mining pool users will transfer their hash rate to our platform. This will be another one Decentralization does not lead to a minor. “

So are fears of centralization justified? The industry experts from Cointelegraph interviewed did not seem to be too concerned. Neeraj Khandelwal, co-founder of CoinDCX, India’s cryptocurrency exchange, noted:

“While it is true that the entry of large global exchanges into the mining sector is likely to continue to dominate part of the Bitcoin mining industry worldwide, I think these concerns may be exaggerated. Entry into space could do so.” Indeed, the impact of an increase in competition between the BTC mining consortia and a decrease in the degree of centralization. “

Khandelwal explained that It is unlikely that one or more dominant mining powers conspire 51% to attempt an attack – Even if you are able to do so – both because of the difficulty of such an action and because of the fact that If you compromise the Bitcoin network this way, you’ll have to dig your own grave.

Traidman is also skeptical of the immediate risks of increasing centralization, as it would be irrational to attack the network: “The value of the chain’s assets would go to zero because it would essentially invalidate itself. Therefore, the risk of centralization is due . ” with an attack of 51% it falls by itself. “Blum commented in the same sense:

“Binance Pool introduces a high level of competition with which other mining pools have to compete using the mechanisms at their disposal. This will further decentralize hash performance in new mining pools.”

Blum believes that The continued growth of institutional miners will give the whole industry a positive boostAs the capital-intensive activity of these collective projects, coupled with the upcoming halving of block rewards, will drive up bitcoin prices for miners to make a profit. Lai also agreed, saying, “I think bitcoin mining exchanges can help with the threat of BTC centralization.”

While the emergence of the Binance pool can be seen as a healthy development that boosts competition in the overall market, existing pools have a reason to be tense. The new player on the field is likely to pursue an aggressive expansion strategy. Lisa He was quick with Binance Pool’s plans to capture the dominant part of the hash rate:

“”Our first goal is to become the industry leader in mining poolsand then we’ll discuss what specific final market share we want to achieve. The industry leader currently has just over 21 EH / s, and our goal for the next 18 months is to exceed this. “

Keep your eyes open

In his most recent interview with Cointelegraph Binance CEO CZ has downplayed the tales that his company is getting too big. Speaking of market processes, he said that users chose Binance products because of the company’s explosive growth, noting that it was still very small compared to the flagship companies in the traditional technology industry.

All of this may be true, but there is no doubt that Binance is growing faster than any other leading crypto company in terms of revenue, user base and the range of services related to the digital assets it offers. Much of this will improve the overall quality of the overall cryptocurrency user experience, but the community must also remain vigilant for possible scenarios where consolidated market power can become an issue. After all, the lack of a realistic 51% threat of attack doesn’t mean that there are no potential adverse effects at all.

After all In sectors with a high degree of innovation that fundamentally influence society, many negative external factors are difficult to predict. Who would have thought in 2008 that Facebook would become a privileged place for disinformation with political ramifications, or that Google would generate a new brand of the media industry based on monetizing user attention?

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