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Bitcoin's End Game: The Benevolent Mining Monopoly?

By Rich Apodaca | Updated

Bitcoin payments are processed by a network of semi-independent auditors known as miners. Each miner receives a subsidy proportional its share of the network’s total computational power, or hash rate. This reward system has driven intense competition among miners, who collectively double the network’s hash rate every month.

Miners contributing less than half of the network hash rate compete under the same set of rules, but a miner contributing a majority of the network hash rate gains unique powers. Most discussions of these powers revolve around the potential to selectively rewrite the transaction history and prevent transaction confirmation.

However, a majority miner can play a different game with greater profit potential and lower risk.

The 51% Attack

Concerns about a “51% attack” tend to focus on the potential for double spending or denial of service (DoS). Countermeasures for both disruptions are relatively straightforward. Double spending will be easy to spot and punish, and therefore brings too much risk for minimal reward. Likewise, a DoS attack could be countered with a simple protocol fix.

With no way to profit from its powers, a majority miner would be far better off just playing by the rules - so the thinking goes. A similar analysis was recently put forward by the Bitcoin Foundation. Others have come to the same conclusion.

From Slim Majority to Monopoly

Given the sum-zero nature of block rewards, miners are motivated to compete against each other. Aside from increasing its own hash rate, a miner can gain an edge by decreasing the effective hash rate of its competitors. One way to do so is to prevent competitors’ blocks from entering the block chain. For miners supplying less than half of the network hash rate, this move is less than 100% effective and risks retaliation. As a result, it’s rarely attempted.

However, a majority miner can do more. It can, with a 100% chance of success given enough time, prevent the blocks of other miners from entering the block chain. Minority miners would have no choice but to go along with the plan, assigning all block rewards to the majority and witholding them from every other miner. A slim computational advantage would result in an overwhelming financial advantage.

With little additional effort, the majority miner could translate this financial advantage into computational dominance. Unable to generate revenue, minority miners would be forced to take equipment offline. With the departure of each miner, the majority’s share of hash rate would increase. If left unchecked, this process would result in the majority miner controlling close to 100% of the network hash rate.

A miner executing this strategy would do no overt harm to the interests of Bitcoin investors, merchants, or consumers. Every valid transaction would enter the block chain, and no double spending would be attempted.

For this reason, countermeasures for bad mining behavior such as DoS or double spending would be useless against the monopoly. Dislodging the mining monopoly could require actions that would permanently damage or fragment Bitcoin, and harm those who continued to use it. Once established, the mining monopoly might become a permanent fixture.

Rational Profit-Maximizing Plan

Aside from nearly doubling its mining revenues, the advantages of operating a mining monopoly would be considerable. Free of the vicious cycle of competition and hardware upgrades that have defined Bitcoin mining for years, the monopoly could focus on keeping the network hash rate just high enough to repel a likely attacker.

During the time it controls the network, a monopoly would be entitled to the full block reward of 3,600 BTC per day. At current exchange rates, the monopoly would gross just under $65 million per month, or $778 million annually. This substantial cash flow could be used to further solidify the monopoly’s position.

The destructive nature of double spending and DoS attacks have led some observers to conclude that any 51% attacker would have to be deranged, incompetent, or politically motivated.

In contrast, the mining monopoly would be driven by the rational free-market idea of maximizing profits by cornering supply and eliminating the competition.

Don’t Be Evil

To prevent loss of confidence by investors and users, the monopoly would strongly resist any action that would harm these groups.

Some users, recognizing the mining monopoly as the very thing Bitcoin was created to eliminate, would leave. But remaining users, seeing no practical differences between centralized and decentralized mining, might be persuaded to stay.

A transition period in which the buying power of bitcoin fluctuated wildly could be followed by stabilization of the exchange rate. Going forward, the monopoly would have every incentive, and the financial means, to follow policies that ensured the future growth of Bitcoin.

A Different Kind of Bitcoin

In some ways, Bitcoin under a mining monopoly might resemble a more open and flexible version of Visa or PayPal. Money would continue to flow through the network, and many of Bitcoin’s useful security features could be preserved. Longstanding end-user gripes could be adressed, for example:

  • Zero transaction fees. Fees currently serve as a spam deterrent. The mining monopoly could deploy responses that would render fees unnecessary.
  • Microtransactions. With no transaction fees, on-blockchain microtransactions might become feasible.
  • Shorter confirmation times. Without the need for independent miners to reach consensus, confirmation times could be reduced.
  • Elimination of the 51% attack fear. The monopoly could secure the network in such a way as to eliminate the possibility of such an attack.
  • Rapid evolution. Without a diverse mining community to persuade, the monopoly might be able to move quickly to implement protocol changes.

Of course, no amount of innovation would address the underlying issue of centralization. The mining monopoly would be a constant target for thieves, attackers, and governments intent on channeling or controlling its power. Should one or more of these groups succeed, the system could collapse abruptly.

Cost-Effective?

Achieving majority hash rate status involves many unknown factors. As a result, wildly-differing cost estimates have been proposed. According to one estimate, a non-pooled mining organization could reach majority hash rate status with as little as $200 million or less if it worked with an ASIC chip foundry.

Even an estimate on the higher end of the scale, $750 million, would represent just a single year’s worth of gross income for the mining monopoly at today’s exchange rate.

Solutions

In its five-year history Bitcoin has faced and recovered from numerous technical challenges, proving its adaptability time and again. Although social and institutional pressures alone might be enough to prevent a mining monopoly, the only way to eliminate the threat would be to change the Bitcoin protocol.

A mining majority exercises its unique powers by using a computational advantage to fork the block chain at will, and then build on its fork faster than the rest of the network can build on its own. A system that deprived a mining majority of this power could offer a solution, but would also bring sweeping changes to Bitcoin itself. Here’s a small selection of proposals:

Conclusions

Bitcoin’s consensus mechanism can be used by any miner with a majority hash rate to eliminate its competitors, establishing a monopoly. Provided that the monopoly acted benevolently toward investors, merchants, and consumers, it could use its unique position to drive down costs and reap considerable profits. The effort would be driven by rational profit-seeking motives, not from destructive or political goals.

Notes