Bitcoin has a flaw. It’s always been there.
Satochi Nakamoto (the nom de guerre of the mind behind Bitcoin) designed this flaw into the software because of one false assumption. What was that assumption? He believed that it was possible to build an open and free economic system built purely on simple self-interest (selfishness). Lots of people make this mistake (famously, Greenspan believed that selfish decision making would prevent the banking crisis of 2008).
It’s not, obviously. Eventually, selfishness will lead one group to rig, cheat, control, etc. the system so they can get better returns. That’s exactly what happened. Here’s the flaw they exploited.
When a single entity (“a single miner” or “a mining pool”) controls over 50% of the transaction processing it can control the entire system. This means they can “see” every transaction, spend the same coins more than once, and deny transactions they don’t approve of.
That’s finally happened. According to analysis from Cornell researchers, a mining pool called GHash has now reached 51% for large stretches of time (effective “ownership” is likely much less).
Here’s the new boss:
Who is Ghash? No clue. Obviously, this is bad thing for an “open and decentralized” currency.
However, the ability of anyone to pull this off does make the next step inevitable. If Ghash isn’t already an NSA , it most likely will be the NSA. From the NSA’s perspective, Bitcoin is a wet dream. How so?
A threat that can be “pwned” by throwing lots of computer hardware at it? That is what the NSA specializes in.
The NSA is a place where a $1 billion program to thwart “terrorist” financing can be justified in an instant. Simply, they can outspend everyone else and buy the best talent to design the mining hardware they use.
The hack pays for itself as it grows (it earns bitcoins from mining). One competitive advantage an NSA mining pool has? It can afford to give nearly all of the money it earns for other miners in its pool back to them.
PS: Any economic system that doesn’t use enlightened self-interest is doomed to failure.
PPS: The Bitcoin boiler rooms trying to pump up the coin to make a buck, hate this post.
From the comments section:
Here’s another article on this subject from Monday June 16, 2014
GHash, a mining pool operated by the anonymous, purportedly Russian-owned CEX.io, achieved 55% of the total network mining power for about a 24 hour span. There is much panic, confusion and even denial around what a majority miner can do, may want to do, and will do.
Just as we predicted, some people are trying to shift the narrative to “OK, GHash may have a 51% majority, but they’d be crazy to launch a 51% attack, it would be counter to their interests.” This argument is dead, killed by empirical data – anyone who tries to recycle this argument in a post-51%-GHash world is at best misled. There are lots of attack types that are available to a 51%er, many of them quite subtle, and the participants do not conform to simplistic models.
The Bitcoin community seems to have a limited understanding of the attacks that a 51%er can launch. This is evident from Gavin’s official response, which claims that there are “only two” attacks: (1) double-spends, and (2) wholesale denial-of-service. Gavin, who is both a friend and an impeccable engineer, may be trying to downplay the danger to soothe the community’s fears [*], but discussions in community forums also show that most people don’t understand what a monopoly miner can do. In particular, they seem oblivious of the more subtle attacks that a monopolist can launch.
In this post, we’ll go over the possible strategies that miners can adopt as a function of their size. Our central thesis is that 50% is absolutely unacceptable for Bitcoin even when there are no attacks being launched. We propose putting technical measures in place to deter mining pools over 25%. Until such measures are in place, we advocate the poor-man’s-alternative-to-protocol-fixes-and-regulation, namely, we advocate putting social pressure on miners to not exceed 25%. A final goal of this post is to caution the community against a toxic mining strategy called transaction differentiation.