In, like, a real magazine. Check it out (it’s on page 84), and the publishers have kindly placed an electronic copy online.
On the topic of bitcoins, there are two graphs that are striking fear into the hearts of all those bitcoining libertarians. Start with:
GHash.IO is a pool of bitcoin miners. For a time on Friday June 13th, they held 51% of the Bitcoin processing power. Which gave them the ability to control the network – almost like a central bank and/or government.
An extract from two Cornell computer science geeks:
Is this really Armageddon? Yes, it is. GHash is in a position to exercise complete control over which transactions appear on the blockchain and which miners reap mining rewards. They could keep 100% of the mining profits to themselves if they so chose. Bitcoin is currently an expensive distributed database under the control of a single entity, albeit one whose maintenance requires constantly burning energy — worst of all worlds.
Anyway, fortunately, some miners have since left the pool, allowing the GHash.IO processing power to drop back to 35%. Here’s the latest graph from blockchain.info:
Why 51% is a big deal…
So if you read my article (not that I’m punting it at all), there is a section that deals with the problem of double-spend.
To illustrate that problem, let’s start with Harry Potter and the Goblet of Fire. If I possess it in hardcopy, I can either read the book myself, or lend it to a friend. But I can’t do both at the same time. Ebooks, however, are a different story. Ebooks are easily replicated – so both my friend and I could read my e-copy of Harry Potter and the Goblet of Fire simultaneously. Or many friends. And even people that aren’t my friends.
In the same way with an electronic currency, there is an issue of replication – because I could spend the same bitcoin that my friend is spending (ie. double-spend).
To address that, Mr Satoshi Nakamoto resorted to math:
- If you cast your mind back into school, you’ll recall dimly that there are irrational numbers in mathematics: numbers like π, e or √2.
- Meaning that their decimal string is infinite.
- So you could, if you wanted, expend lots of processing power looking for blocks of decimals in the deep dark space of their galactic stretch.
In the world of bitcoin, the mining computers look for the next block in the chain of a mathematical proof (one that has a similar infinite decimal string, as I understand it). And when one node (being one of the mining computers) thinks it has a solution, it broadcasts the solution to the network. If 51% of the network agree that the solution is correct, the block of proof gets embedded in any open bitcoin transactions, those transactions are marked as processed, and the network moves on in search of the next block of decimals.
The idea is that no bitcoin can be replicated: in order to replicate it, someone would have to have greater processing power than the whole combined processing power of the network (because it would have to go find the most recent block, and all the preceding blocks which the network has produced since inception).
So the problem of double-spend is solved.
But let’s go back to the “if 51% of the network agree that the solution is correct” part…
If you controlled 51% of the network, you could instruct your mining computers to accept solutions only from other computers in your 51%. It means that you would find all the bitcoins, and you would earn all the transaction fees, and you would control anything that the network does from that point going forward.
According to Business Insider, the only counteraction to this type of processing power is that it’s a policy of mutual destruction: once a single entity gains control of the network, Bitcoin’s value would tank.
Well here’s a lesson in empiricism: it didn’t. Its value fell slightly. So clearly bitcoin users are kind of okay with the network being controlled. And if you’re looking for historical precedent of currencies being under the control of single entities, look no further than everywhere.
Here’s a theory: free markets contain within them the seeds of their own destruction, because the rise of a dominant player is simply an inevitability of time?
Kosta July 8, 2014 at 09:28
This is a beautifully insightful article.
I agree with your theory regarding BitCoin containing the seeds for its own destruction within it. Personally I suspect that a decentralised regulation framework will emerge (a counteraction which Business Insider possibly failed to consider) but I guess time will tell.
Any idea why GHash.IO gave up their dominant position?Reply
Jayson July 8, 2014 at 09:47
Their spokesman initially said something along the lines of:
“We understand that the Bitcoin community strongly reacts to GHash.IO’s percentage of the total hash rate. However, we would never do anything to harm the Bitcoin economy; we believe in it. We have invested all our effort, time and money into the development of the Bitcoin economy. We agree that mining should be decentralized, but you cannot blame GHash.IO for being the #1 mining pool.”
Then a member of GHash removed some of their resources from the pool. Which really effectively means that the monopoly is still in place – I mean, who is to stop the control from being wielded jointly?
I’m interested in your thoughts on a decentralised regulation framework though. My understanding is that the decentralised nature of the network is meant to be self-regulating… But the problem with regulators is that they almost always end up captured – which is kind of what is going on with Bitcoin. How do you then create a new framework? Because frameworks require enforcement, which in turn requires centralisation… I always thought that the attraction of Bitcoin was its self-regulation. My guess is that you’ll either need a new blockchain with new rules, or the current code will need to find some way of punishing large mining pools… But that’s really amendment to the self-regulation?Reply
Kosta July 8, 2014 at 17:59
I think you’ve hit the nail on the head when you suggest that we’ll either need a new blockchain with new rules, or the current BitCoin protocol will need to find a way to punish large mining pools.
I did some research on why GHash.io lost their dominant position. It turns out that one of the possible reasons is that they were the target of a full-blown Distributed Denial of Service attack (DDos) in mid-June, when fear of their dominant position was rife. You can read more about this DDos attack here: http://www.cryptocoinsnews.com/news/bitcoin-mining-pool-ghash-io-ddos-ed-response-51-attack/2014/06/15
So going back to the first paragraph above, whilst I’m not sure which way digital currency will evolve, I do think that the disincentivising and subsequent punishment of large mining pools is possible without the existence of a centralised body responsible for the enforcement of a regulatory framework.Reply