The Case for Bitcoin Zero
Thursday 26 June 2014
Many people are confident that bitcoin prices will soar for the foreseeable future. It seems clear to others that the rising star that is bitcoin could be headed back down to having no value at all.
It would likely take a large negative event at just the right time; when the market had capable contenders ready to go, and the investors and users of bitcoin had sufficient faith to try the alternatives. Despite Forbes contributor Oliver Pursche and others predicting that bitcoin bites the dust this year, a more optimistic outlook seems to be prevalent. Some sensible people think we will see bitcoin values as high as $3000 or even $4000-5000 USD in 2014. Indeed many people would sooner wager on a million dollar bitcoin than a worthless one. But there are very real threats to bitcoin out there, to think otherwise is naive. The most obvious possible calamities for bitcoin seem to fall into the categories of incidents involving miners, attacks on the network, and undiscovered vulnerabilities. Naysayers will of course be shaking their heads already, but for those who might care to have the case be made in a bit more detail, read on.
Centralization is a main theme when talking about fatal weaknesses because that's a classic in the blockchain world. Systems with central points of failure get replaced by de-centralized versions. So it's natural to be sensitive to trends toward centralization, and that's what we have going on in the bitcoin mining world. Having fewer, larger mining pools makes bitcoin more vulnerable. Gavin Andresen downplays the consequences in a recent Bitcoin Foundation blog post. But he seems to acknowledge both the trend toward centralization, and the fact that some risk exists. Miners are consolidating to share administrative overheads across larger groups of miners. And every resource hungry thing that comes along, whether it's sidechains or merged mining, adds just a bit more incentive to consolidate. Many chains can be mined at once, for example, but a full node for each network must be run. Not a big deal for a large mining pool operator, but for an individual the system resources are likely to be in limited supply.
Yes, the dreaded 51% attack is back! Face facts people, this topic is not going away. One mining pool operator reached majority hashing power on the network last week for extended periods of time. According to researchers at Cornell University, the secretive mining pool operator GHash.io apparently reached levels of up to 55% of computing power on the network, yet back in January GHash issued a press release announcing measures to prevent accumulating 51% hashing power.
GHash is not only a mining pool into which there is little or no visibility, but they have had accusations of foul play levelled at them in the past. The allegations against GHash include attacking another mining pool, and executing targeted double spend attacks. In a terrific piece earlier this week Eyal and Sirer walk us through lots of things an attacker with 51% control of the network can do. They gave plenty of examples of more subtle attacks a 51-percenter could do that would not be obvious.
Surely there are plenty more than what is mentioned too, including perhaps extorting higher fees for transactions which encode some meaning beyond the literal bitcoin transaction, like Mastercoin and Counterparty and Colored Coins. If people see obvious evidence of a miner abusing a 51% position and realize what is going on, investor confidence in bitcoin will be shaken. But subtler ways of tampering with things by exploiting the 51% position could be more difficult to detect. People could even become desensitized to these attacks if they continue to occur but never seem to have a personal or obvious impact.
The scenario for bitcoin zero is that first some tragedy happens to the network,
then the public readily adopts a replacement.
If that happened bitcoin would implode as the miners, investors, or users made an exodus to the shiny new coin 2.0 replacement. But is that scenario plausible yet? Are there competitors that could step up, on very short notice and take up a lot of slack? It would mean their market cap exploding, since none of the other coins have much share relative to bitcoin. Ethereum has prototypes, but still has some large important pieces of the puzzle to pull together before they're ready for primetime; such as what POW algorithm to use, or how they will issue their currency. Bitshares has some nice ideas as well: a budget, and some coders but to date have not had the focus to stay on track and put a product out for the world to use. There is NXT as well, also looking like a nearly ready alternative, but somehow never quite ready. Perhaps these and more would be replacements are just not preparing for the day when they might need to step up because they underestimate the likelihood.
At a recent EconTalk, Gavin Andresen said, "It's getting to be a scarier and scarier experiment as it gets larger and larger, because if it fails, there will be a lot of people who will lose the money they've invested if bitcoin prices go to zero.
Belly up bitcoin is not likely to happen tomorrow, but what if it did go down in the near future? Would you recognize the signs of a price crash and flight to competitors? At what point would you get out, if at all?
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