Journalist: Nadeen Gitana | Editor: April Cho, Teresa Wang
A recent study jointly published by researchers from Princeton University and Florida University have claimed that “China is bitcoin’s number one threat”. The paper has captured the attention of tech and blockchain media outlets along with big names in the cryptocurrency industry.
These statements and media articles have focused on a provocative central question: the presence of a large number of bitcoin miners in China. The research uses statistical analysis to answer whether the centralization of mining power in a nation does indeed pose a significant threat to the blockchain ecosystem. Threat to bitcoin will be defined as a singular entity controlling more than 51% or more of the computing power of the bitcoin network so that the bitcoin blockchain is no longer decentralized and immutable, otherwise known as a 51% attack.
In this piece, we will walk you through this debate from its informal early emergence in nascent crypto communities to its culmination most recently at a talk during San Francisco Blockchain Week.
A Briefer on Blockchain Mining and 51% Attack
Before delving into the question of whether there is reasonable grounds to fear the implications of the proliferation of hashing power in China, we must first examine the significance of bitcoin miners in general. Afterwards, we can pose the question of whether being located in China can threaten the network.
Let’s get back to the basics with the Bitcoin white paper by Satoshi Nakamoto. According to Nakamoto, there are two key actors in the blockchain ecosystem - nodes (miners) and users. Both actors require hardware connected to the internet to access the bitcoin blockchain. The nodes-- physical computers-- validate transactions and then process them by logging them as blocks connected to each other to form a chain otherwise known as the bitcoin public ledger.
The task of building a block requires an immense amount of computing power (hashing power), which is also called Proof of Work (commonly known as PoW) As an incentive to execute PoW, nodes receive rewards in the form of transaction fees and in newly mined or “minted” bitcoins.
All nodes have a log of the entire chain to secure the network from a single point of failure and “as proof of the sequence of events witnessed”. Thus the more nodes on the network the less centralized and more secure the network is. Users of course are those making these transactions. Their identities remain private while their individual transactions remain on the public chain.
Due to this transparent and decentralized system, bitcoin cannot be controlled and manipulated “as long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers”. In other words if any group of nodes is able to control more than 50% of the hashing rate (computing power) they can then choose to collude to attack the system by manipulating it to double spend, deny or prevent transactions, this is called a 51% attack. Has this happened before? Almost. Is it happening again today? Possibly, because bitcoin mining nodes have consolidated their hash power into mining pools.
Mining pools are when miners direct and combine their hash power to share mining rewards. Miners do not need to be located in the same location to pool or share their hash power and can redirect their hash power at any time.
More than 50% of mining pools are located in China (see Figure 1 and 2). However, that does not mean that more than 50% of mining nodes are in China. The centralization of mining pools in China is largely as a result of it’s cheap water and low electricity costs, especially in the western provinces, along with its dominant share in the manufacturing of mining hardware.
China Transforms Bitcoin Mining by Using ASIC and Mining Pools
Bitcoin was first mined using a CPU or GPU until 2012 when Application Specific Integrated Circuits (ASICs) were used. ASICs specifically for bitcoin mining were first developed in China in 2012 by Avalon, a subsidiary of Canaan Creative (Canaan). A year later in China, Bitmain, presently the world’s largest designer of ASICs chips and owner of the largest Bitcoin mining pools, arrived on the scene. Avalon and Bitmain paved the way for China’s dominance in the bitcoin mining hardware industry and, as a result, bitcoin mining pools as well.
Bitmain operates two mining pools; AntPool and BTC.com, and is a major investor in ViaBTC. Together these pools total 46.8% of the hash rate (see Figure 2). F2Pool, BTC.top, Bixin, DPool, 58 Coin and Poolin are also located in China with a few also running operations in other countries. That brings the total amount of bitcoin mining pools located in China is approximately 73%. Some pool and node locations are unknown but many crypto observers attribute them to China.
Is China a Threat to Bitcoin?
Based on the data above, it can be. However, the threat is not as dramatic as recent sensationalist headlines have made it seem. The debate of centralized mining is not new to the internet. The debate was brought up earlier this month at the San Francisco Blockchain Week forum. There, Ben Kaiser, one of the researchers behind the Princeton-Florida report cited above, gave a talk about their findings. PANews caught up with Kaiser to discuss his research. According to Kaiser, China can pose a threat for two main reasons;
China’s control and censorship of internet traffic in the country can prevent blocks from reaching nodes outside of China and slowdown the Bitcoin network. The latter of which has already occurred between 2015 and 2016 until an upgrade was introduced by bitcoin developers.
China’s centralized government can influence miners to shut down their operations due to political concerns that would outweigh economic incentives for domestic miners. Such an action has already occurred for cryptocurrency exchanges when they were banned in September of last year. (Many of the exchanges simply moved their operations.)
If both attacks occurred what would happen to bitcoin? The network would not be completely destroyed but it would significantly slowdown. Kaiser believes that one of the priorities for bitcoin should be to decentralize its mining. He states that such decentralization is already underway this past year. While 74% of mining pools are in China, according to data from Kaiser and his team, the total network hash power physically in China is 25%. Kaiser mentions that such percentages are not one-hundred percent accurate as many node locations are still unknown.
This means that much of the hash power directed at Chinese mining pools is not all located in China. As a result, those mining nodes directing their power at Chinese mining pools can redirect their power at any time.
While Kaiser and his team argue that there are political motives that can lead China to “destroy bitcoin” the likelihood of this occurring is low. Incentives embedded in the bitcoin network to secure stability are argued to outweigh attacks to the network as stated by computer scientists and researchers.
In the context of the US-China trade war, the technology race for national superiority deems any inclination towards China controlling a technology an automatic threat. This past summer a Department of Defense report stated that blockchain is a “key innovation of the future”. Today, the blockchain industry is flourishing in China and continues to attract investors, academics and developers to the nation.
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