Will Binance's mining pool dominate the market? Other pool operators don't think so

Quick Take

Binance recently ventured into the business of mining pools. Will it grow too big? Market participants reached by The Block are doubtful
F2Pool’s Thomas Heller, for instance, said in the next 3-6 months, Binance could control 5-10% of bitcoin network’s hash rate
CoinMint’s Michael Maloney said he doesn’t expect Binance pool to grow beyond 10% of the hash rate
Other experts shared concerns about centralization in the long-term

Crypto exchange Binance recently got into the mining pool business. While the exchange's move is good for competition, some concerns and challenges remain, other mining pool operators and industry experts told The Block.

"I believe this to be a resounding negative," Alejandro De La Torre, VP at mining pool Poolin, told The Block. "Binance CEO Changpeng Zhao not too long ago wanted to reorg the bitcoin blockchain because of a hack on their exchange. This is unacceptable and very concerning for us," said De La Torre.

Another concern is centralization, De La Torre argued. Binance holds "a lot" of bitcoin and now the exchange also creates it, "which is what I call centralization."

Further, as Binance wants miners in its pool to use its exchange to sell their mined bitcoin, in the event that the exchange suffers a security incident (which has happened before), it is risky for miners, according to De La Torre.

Some other market participants say running a mining pool is a technical task and it may not be an easy road for Binance and other exchanges.

"Techniques are extremely important for mining pools. It needs high stability, high performance, high-speed block synchronization speed, etc," ViaBTC CEO Haipo Yang told The Block, adding that exchanges will "soon" realize it is not an easy job.

Jane Hu, COO of BTC.com (a mining pool operated by Bitmain), shared similar thoughts, telling The Block that "a mining pool is a technical product and not the easiest to run."

Further, traditional mining pools offer various services, such as building mining hardware and software, as well as advisory services. "Binance doesn't have the capability to do this," Thomas Heller, global business director at F2Pool, told The Block.

Poolin’s De La Torre concurred. He added that traditional pools have been creating tech for years – for instance, Poolin's open-source Bitcoin Universal Mining Protocol (BUMP) and Slush Pool's Stratum V2 mining protocol. "These are all things we do to help the ecosystem. I do not see Binance developing anything of the sort in the mid to long term future," he said.

'Liquidity pump'

Binance is the third noteworthy exchange to jump into the business, following OKEx and Huobi.

The key motivating factor is to grow their trading volumes, Leo Zhang, former principal at crypto miner Iterative Capital and now founder of Anicca Research, told The Block.

Exchanges are constantly looking for new sources of volume, and miners are the largest natural sellers and suppliers of coins, said Zhang. While miners don't necessarily always sell, when they do, most of the time it is via over-the-counter (OTC) desks. "Exchanges want to eat into that market share," he said.

An exchange mining pool helps create a "liquidity pump" that sends sales flow directly into an exchange, said Zhang.

Michael Maloney, CFO of North American mining company CoinMint, said he would expect that Binance is attempting to create and service some of the new financial products (hash rate swaps, difficulty futures) that are available to miners. "This would indeed be a huge benefit to their pooled miners and draw in more users," said Maloney, adding that these products are largely under development and haven't reached full use yet, so it is unclear how popular they will be.

Indeed, a mining pool is more of a strategic part of an exchange, said BTC.com's Hu, adding that it is "not very profitable."

OKEx's chief strategy officer Alysa Xu, did tell The Block that the exchange’s pool wasn’t created purely for profit. “We give back 100% of OKEx Pool revenue to the community and users, and empower ecology development."

Huobi and Binance did not respond to The Block's requests for comments.

OKEx and Huobi launched their mining pools late last year and have become part of the top ten mining pools in the world. Together, they now control around 12% of bitcoin’s hash rate distribution.

Source: The Block Research, BTC.com

Will Binance Pool dominate the sector?

Binance Pool, within one month of its launch, controls around 1.5% of bitcoin’s hash rate distribution. Although it’s hard to predict, market participants expect the Binance pool to become a medium-sized pool.

In the next 3-6 months, Binance's pool could control 5-10% of the bitcoin network hash rate, F2Pool’s Heller told The Block.

CoinMint's Maloney echoed this sentiment, saying: "Overall, I don’t expect Binance pool to grow beyond 10% of the bitcoin hash rate market.”

Maloney expects regional and private pools to grow and slowly eat into the share of dominant players rather than exchange-run pools. For instance, he expects to see a North American mining pool grow to regional dominance and collect between 5% and 8% of the bitcoin hash rate.

Dmitrii Ushakov, chief commercial officer at Russian crypto mining center BitRiver, said mining pools’ market share has "consistently" and "drastically" been changing for the past seven years. Ghash.io, for instance, which had over 45% market share over six years ago and was seen as a threat to the bitcoin network given fears of a 51% attack, no longer exists. Mining pools such as AntPool and BTC.com, which seemed like the "unwavering market leader" in recent memory, do not rank even among the top two mining pools now.

ViaBTC's Yang said even if exchange pools' share grows, their profit won't, given the recent halving and other factors.

Looking ahead

Overall, some people from pool operators – such as BTC.com's Hu and OKEx’s Xu – believe that Binance's entry into mining is a positive development for the industry.

Blockchain.com's head of research, Garrick Hileman, said that Binance's pool could be particularly helpful for decentralizing an Asian mining pool market long dominated by a couple of pool operators.

But yet again, "legitimate" concerns such as "excessive consolidation in the crypto industry leading to less decentralization and competition, and increasing conflicts of interest" remain.

“These concerns were recently raised with Binance's acquisition of CoinMarketCap, and similar concerns may arise if Binance threatens to dominate the mining pool sector,” said Hileman.

Looking ahead, there could be only two categories of pools: exchange-pools and manufacturer-pools (such as AntPool), said Anicca Research’s Zhang. "The former category is a result of financialization in mining, and the latter is of industrialization in mining."

Update (May 18): This story has been updated to mention that Jane Hu is COO of BTC.com, and not Bitmain