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I am new to cryptocurrencies so if there is something I said isn't true please let me know.

To win a Bitcoin you must mine a new block, and the chances to be successful are pretty low. That's not bad because it is distributed equally based on with how much computational power you mine. So for example, if you have a 20% of the total computation power mining you are going to produce a block every five (in the long run).

But if your chances are low, for example, 0.01%, you will produce one block every 10000 blocks. Estimating that the average time to produce a block is ten minutes you will have a block every 100000 minutes or 1666 hours (in reality there are lower chances, I am not sure). The problem with this is that there is people who needs to get cash daily to live, therefore they can’t waIt so long to get the money so they stop mining to stop paying the electricity that cost to run all the computers. Which in consequence produce transaction to be much slower, therefore getting us back to the problem for the one that some people choose Bitcoin (cryptocurrency) over Dollar (tradition bank, physical currency).

So it would be better if you would get a part of the reward for collaborating with the mining more than only if you were the one to produce it, and for that reason, mining pools were invented.

The problem with mining pools is that to solve what I mentioned above and get bigger chances to produce a block there should be a small quantity of them. And if this happens the control of mining stop being decentralized and starts being centralized, having a new kind of ‘banks’ controlling the flow of transactions in Bitcoin (cryptocurrency).

  • Is Bitcoin, or will be in the future, after all centralized?
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    "Which in consequence produce transaction to be much slower" -- I think you misunderstand the relationship between the number of miners and the network's rate of transactions. Fewer miners does not mean fewer transactions. – Jestin Jan 10 '18 at 5:53
  • The speed of a block being produced doesn´t depend on how much computation power is there mining? – Michael Szer Jan 10 '18 at 17:39
  • It does, but every 2,016 blocks the network re-targets to make blocks take 10 minutes. No matter how much or little hashing power there is, a block is always supposed to take around 10 minutes. – Jestin Jan 10 '18 at 17:52
  • So the hash difficulty depends on how much miners there are? – Michael Szer Jan 10 '18 at 17:55
  • Yes, and how much hashing power they have. You should read this: bitcoin.stackexchange.com/questions/148/what-exactly-is-mining – Jestin Jan 10 '18 at 17:59
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Short Answer: The control is mostly with few hands.

Long Answer:

Even though in expectation the block generation may seem somewhat reasonable with 0.01%, the variance is quite high. Also, the mathematical puzzle miners are solving continuously follows the property called memoryless.

In brief, the memoryless property of a puzzle is say you failed to solve the puzzle till time t_0, then the probability that you will at sometime later is equivalent to a fresh start at time t_0, in other words, the failed past effort does not increase any chance of winning a block in future.

So, to reduce variance miners come together to form pools to reduce the variance. Coming to centralization the current hash rate distribution can be found in (https://blockchain.info/pools).

The intermediate between total centralization point comes a classic attack call 51% attack(some close instances in history can be found https://www.coindesk.com/bitcoin-mining-detente-ghash-io-51-issue/). The caveat with 51% attack is that the stakeholders may lose trust in bitcoin in case of 51% attack which will reduce the value of bitcoin which might not be beneficial to miner considering the effort required to launch a 51% attack.

  • So if BTC.com, AntPool, and BTC.TOP work together they could control the BlockChain, right? – Michael Szer Jan 10 '18 at 17:52
  • There are subtleties in the word "controlling" the blockchain. If BTC.com, AntPool and BTC.TOP work together they will acquire more than 50% of the computation power. With this fraction of the power, they can launch attacks like double spending, Denial-of-Service to a particular user but to create new blocks they still have to solve PoW correctly. Also as mentioned in the answer, this attack might not be incentive compatible to a rational attacker(monetarily) as it could lower the trust of people in the corresponding cryptocurrency. – sourav Jan 10 '18 at 19:17
  • What prevents them (BTC.com, AntPool, BTC.TOP) from exchanging their Bitcoins in dollars and them launch attacks? People who have the savings in Bitcoin could lose a lot of money. (Should I make another question or continue here?) – Michael Szer Jan 11 '18 at 18:56
  • Miners use ASIC(Application-specific integrated circuit) which are specifically designed for bitcoin mining and are not easily(close to impossible) to programmable to for other purposes. If bitcoin collapses the mining hardware goes to void. – sourav Jan 12 '18 at 5:17
  • Also, considering the attacks (double spend, alternate chain, DOS) possible a rational miner will have the incentive to keep the trust alive as it will give higher returns in the long run. Additionally, because of altruistic nature of the community, these attacks are least expected.(You can post a separate question where I could provide more detailed answer) – sourav Jan 12 '18 at 5:23

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