Proximity Premium Flaw

Latency is the time required for communication. Information moves at a speed not greater than the speed of light and therefore latency cannot be eliminated. Different distances between miners implies announcements will be known to some before others.

While a miner remains unaware of an announcement he wastes capital grinding on an weak candidate. As more time passes it becomes exponentially less likely that the miner will be rewarded for the candidate. Miners therefore compete to see announcements before other miners, as this reduces opportunity cost.

If we were to disperse miners with equal hash rate at equidistant points around the Earth they would experience the same average latency. Yet due to the financial benefit of reduced latency, they would tend to move closer to each other. This force is pooling pressure, and manifests in several ways.

One manifestation 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 capital flow, since the higher hash rate associated with greater capital utilization is a form of co-location. Another is the existence of relays, which have the same effect as hash rate aggregation.

The proximity-based pooling pressure is a consequence of the chain sequence required by consensus rules. Bitcoin prescribes winner-take-all transaction ordering, which produces disproportionate opportunity cost. The variance discount is another pooling pressure caused by consensus.

The defense that Bitcoin intends to raise is market defense against anti-market forces. To do this it must distribute hash power broadly among people so that it becomes difficult to co-opt. However pooling pressures inherent in the consensus work against this objective. This is why the characteristic is termed a flaw.