Blockchain, DLT Technology, Mining and Consensus Protocols explained with 50 questions and answers (8).

36. What are the implications of mining centralisation and why is it so relevant?

The centralisation of mining in PoW has several important implications:

• Risk of 51% attacks: If a single group or coalition of groups were to control more than 50% of the network’s hashing power, they could theoretically carry out a 51% attack, where they could reverse transactions, double-spend or even take control of the network.
• Reduced security: A network with fewer miners is more vulnerable to attack, as there are fewer people monitoring the network and looking for malicious behaviour.
• Less decentralisation: PoW is promoted as a decentralised technology, but the centralisation of mining runs counter to this principle. This can result in a small number of actors having excessive control over the network.

37.  What can be done to overcome this problem of centralisation of DLT technology, which by its very nature is decentralised?

There are several proposals to address the centralisation of mining in PoW:

• Changes to the consensus algorithm: Some propose changing the consensus algorithm to one that is more resistant to centralisation, such as Proof of Stake (PoS).
• Regulations: Some propose implementing regulations to limit the concentration of mining power in the hands of a few groups.
• Increased participation: More people are encouraged to become miners and participate in the network to increase diversity and decentralisation.

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38.  Blockchain Mining in DLT: Incentives and Liquidity The Need for Blockchain Mining:

Block mining is a fundamental process for the functioning of the Bitcoin network.

The main functions of mining are:

• Verify transactions: Miners verify that transactions are valid and are not an attempt at double-spending.
• Aggregating transactions on the blockchain: Miners aggregate transactions into blocks and add them to the blockchain, creating a permanent and immutable record of all
• Securing the network: Mining helps protect the Bitcoin network against attacks and manipulation.

Attractiveness of Mining:

• Block mining is attractive for a number of reasons:
  • Financial incentive: Miners are rewarded with bitcoins for their work.
  • Contribution to the network: Mining is a way to contribute to the security and functioning of the Bitcoin network.
  • Profit potential: The price of Bitcoin has experienced significant growth in recent years, making mining a potentially lucrative activity.

Benefits for the Miner:

 There are two main benefits for miners:

• • Bitcoin rewards: Miners receive bitcoins for each block they mine.
  • Transaction fees: Miners can also charge transaction fees for the transactions they include in the blocks they

Influence on Market Liquidity:

• Blockchain mining can influence the liquidity of the blockchain market in several ways:
  • Increasing the supply of bitcoins: The creation of new bitcoins through mining increases the total supply of bitcoins on the
  • Increased trading activity: Mining can stimulate trading activity in the Bitcoin market, as miners need to buy and sell bitcoins to cover their costs and make a profit.
  • Increased security: The security and stability of the Bitcoin network, which is enhanced by mining, can increase investor confidence and market liquidity.

Issuance of Bitcoins per Mined Block

Necessity of the issue:

• The issuance of bitcoins for each mined block is fundamental to the security and functioning of the Bitcoin network.
• Incentivises miners to participate in the network: The bitcoin reward compensates miners for the cost of electricity, hardware and time spent mining.
• Ensures transaction validation: Miners verify transactions and add them to the blockchain, which creates a public, immutable record of all Bitcoin transactions.
• Protects the network against attacks: The mining difficulty is automatically adjusted to maintain a constant block time, making it difficult for attackers to manipulate the network.

Payment to miners:

• The only way to pay miners for their work is to issue new
• There is no centralised transaction fee in Bitcoin: Transaction fees are optional and are paid to miners who include transactions in their blocks.
• Issuing new bitcoins is the fairest and most efficient way to reward

Halving effect:

• Halving the block reward by half may discourage some miners from participating in the network.
• However, Halving also increases the scarcity of Bitcoin, which can increase its value.
• The most efficient miners can remain profitable even after Halving.
• Halving is a foreseeable event that miners can take into account when making investment decisions.

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The Halving of the reward for Bitcoin mining by half