Incentive for mining by regular users

Question

Most of the time that a regular user gets introduced to the concept of mining, they're immediately non-incentivized by the community and also by the high-cost of hardware compared to the actual reward.

With the steady difficulty growing and the environment around mining getting more competitive, it's pretty much a highly-specialized task where only large corporations with enough connections to buy cheap mining hardware can actually make an investment out of mining. Not the regular user.

If we fast-forward a couple of years I see this becoming more and more centralized and only few organizations will be able to actually afford mining.

My question is, how do we keep it decentralized and not resort to a situation where the power of the entire network resides only within few large corporations?

Answer 1

Leaving aside the question of the entry cost of mining (i.e cost of buying hardware), once you have this hardware there is actually an incentive to mine for a pool rather than to mine solo.

Indeed in both cases your expected value is the same but the variance is smaller when you mine for a pool than when you mine solo. That means that in the (infinite) long run you would theoretically earn the same amount of bitcoins in both cases but not in the same manner : in a (big) pool you would often get small fractions of bitcoins whereas solo you would mine a block very rarely but get a lot of bitcoins when you do.

So by mining solo you are relaying a lot on luck, and by mining for a pool you reduce the role of luck. Usually when people make an investment (here it would be buying hardware) they prefer to reduce the importance of luck for the returns, that's why I would say there is an incentive to mine for a large pool. And for the same reason there is an incentive for the pools the get larger : the larger the pool the smaller the variance.

However there is a counter-incentive for a pool the get more than 50% of the hashrate, because if one pool was discovered to be in such a position it could kill the confidence in Bitcoin thus killing bitcoin's value and all that mining hardware that the pool invested in could turn worthless.

So maybe the equilibrium is that there will be a few large mining pools but none will have more than 50% of the hashrate.