Pooling Pressure Risk

Pooling pressure is the set of financial incentives for hash rate aggregation, specifically:

• Proximity Premium
• Variance Discount
• Market Variation
• Market Distortion
• Economies of Scale

While latency and variance are unavoidable, consensus rules actually create the first two financial incentives. Variation is a consequence of varying market price for mining resources. Distortion is a consequence of varying non-market costs including tax, regulation, subsidy, and patent; the force that Bitcoin is intended to resist. In a threat scenario economies of scale may become negative due to the risk of greater visibility but is otherwise positive.

There are several manifestations of of pooling. One is geographic, where independent miners become physically closer together. Another is cooperative, where formerly-independent miners join forces and co-locate grinding. Another is virtual, where miners become grinders and aggregate hash rate to a single remote miner. Another is the existence of relays, which aggregate miner hash power. Another is capital flow, since the higher hash rate associated with greater capital utilization is a form of co-location.

Given a perpetual positive pressure, transaction selection will eventually be reduced to one person's control. It is possible that this is already the case. The risk to Bitcoin is that one person is the sole defense of utility, making successful co-option inevitable. This risk cannot be mitigated by the economy.

Pooling creates the Bitcoin analogy to the United States Federal Reserve system. The system was designed to facilitate tax through debasement of a soft money. It offered state support for a monetary proxy in trade for hard money. This combination was designed to create a pressure to collect hard money at the central authority. Once this collection was sufficient the state did away with the pretense and simply seized all remaining hard money. All states have similar systems and cooperate to defend them.

This does not imply that mining is adversarial to Bitcoin. Following the analogy, free banking is not adversarial to gold. Mining is a necessary part of Bitcoin. Pooling represents risk, though pooling pressure is not created by miners but by flaws in Bitcoin itself.