The main (though not only) reason bigger blocks favor bigger miners has to do with latency. As the block size increases, so does the time it takes for a newfound block to transmit through the Bitcoin network. That is disadvantageous to all miners, except for the miner that found the block. During the time it takes a new block to make its way through the network, the miner who found the block gets a head start mining on top of the new block, while other miners are still busy mining on top of an older block. So as a miner find more blocks, it gets more head starts. And as a miner gets more head starts, it finds more blocks. Meanwhile on the other end of the equation, smaller miners find fewer blocks and, as a result, have more trouble turning a profit, ultimately causing them to drop off the network. Bigger blocks tend to centralize mining.
“Bitcoin achieves policy neutrality by decentralization of mining,” Back explained. “If one miner won’t mine your transaction, another will. It’s an additional benefit if miners are many, geographically dispersed and anonymous, since it’s complex to coordinate a policy imposition on many small geographically dispersed miners.
According to Wuille:
“If lots companies run a full node, it means they all need to be convinced to implement a different rule set. In other words: the decentralization of block validation is what gives consensus rules their weight. But if full node count would drop very low, for instance because everyone uses the same web-wallets, exchanges and SPV or mobile wallets, regulation could become a reality. And if authorities can regulate the consensus rules, it means they can change anything that makes Bitcoin Bitcoin. Even the 21 million bitcoin limit.”
“In computer science there are fundamental trade-offs between security and performance. Bitcoin’s automated integrity necessarily comes at high costs in its performance and resource usage. Compared to existing financial IT, Satoshi made radical trade-offs in favor of security and against performance. The seemingly wasteful process of mining is the most obvious of these trade-offs, but it also makes others.