Bitcoin faces biggest threat yet: a miner takeover

Jun 17, 2014 by Peter Svensson
In this April 7, 2014 file photo, a man arrives for the Inside Bitcoins conference and trade show in New York. The Bitcoin digital currency system is in danger of losing its credibility as an independent payment system because of the growing power of a group that runs the some of the computers behind it. (AP Photo/Mark Lennihan, File)

The Bitcoin digital currency system is in danger of losing its credibility as an independent payment system because of the growing power of a group that runs some of the computers behind it.

In recent weeks, a British-based "mining pool" called GHash has amassed nearly half of the Bitcoin and has briefly gone over 50 percent. Miners operate the computers that keep track of and create additional coins.

Miners pool their computing power to spread the financial risk of their operations. If GHash amasses more than half of the computing power devoted to Bitcoin, it could in theory control the flow of transactions, freeze people out of the network and keep all future bitcoins for itself.

Although GHash says it's committed to preserving Bitcoin as a trustable technology, the mere fact that one player can amass majority control could undermine trust in the currency, which is worth only what people are willing to pay for it.

"The entire premise of bitcoin relies on the fact that no single authority would control the majority of the mining power," said Ittay Eyal, a Cornell University researcher who studies bitcoin vulnerabilities.

The value of bitcoins has fallen 6 percent in a week to around $600 as the threat posed by GHash has become clearer, although the decline is within the range of normal fluctuations for the volatile currency.

Bitcoins allow people to send money over the Internet without going through banks. This means transaction costs are low, but it also means they're useful for illegal activities such as money laundering and drug sales. Bitcoins have also become a target of speculators betting on a continued run-up in the currency. Its value has grown a hundredfold over two years.

From a technical standpoint, bitcoins are sequences of numbers, painstakingly produced by computers churning through millions of calculations. Bitcoin transactions are recorded in a virtual public ledger, known as the blockchain. Miners are in charge of maintaining the blockchain. As their computers perform the calculations to do that, the process rewards them with newly minted bitcoins.

A single mining computer might take years to produce a single block of coins, and there's no way to know when that might happen. In pools, miners divide the bitcoins they create among themselves in proportion to the work done, providing with them with a steadier stream of income. The pools aren't created to threaten the trust placed in bitcoin; it's a side effect of the pool's growth.

GHash is controlled by a British company, CEX.IO Ltd. The company said in a statement Monday that it wants to protect Bitcoin, but it doesn't want to turn away people from the pool or impose other temporary solutions to back away from the 50 percent threshold.

GHash said it's arranging a "round table" meeting of key players in the Bitcoin system in July to "with the aim of discussing and negotiating collectively ways to address the decentralisation of mining as an industry."

Eyal said the problem needs to be fixed in "a very drastic fashion" to reduce the incentive to create pools. That will probably with an update to the software the underlies the system, he said.

Explore further: Bitcoin: the digital currency that became a target for speculators

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User comments : 8

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Yes_Im_Right
3 / 5 (2) Jun 17, 2014
This article is total BS. The people who write these articles clearly have no clue about how Bitcoin pools work. In order for a 51 percent attack to happen, there has to be a single operator who controls the 51 percent of computing power. The people who run the pool are NOT in control of the machines in the pool. They only control the servers who these machines connect to. Also, the statement above that says,"Miners pool their computing power to spread the financial risk of their operations", is totally inaccurate. They use a pool to make a steady stream of income instead of hoping their miner will someday "find a block" and therefore collect the reward. Don't believe this article because it comes from someone that is clueless...
ThomasQuinn
3.7 / 5 (3) Jun 17, 2014
It may just be me, though I doubt it, but it seems to me that the entire BitCoin-craze is not at all dissimilar to the Tulip Mania of the 17th century and other semi-scam alternative currencies. BitCoin does not represent any sort of objective value, therefore, it is purely fiduciary, therefore it differs from regular currency only in that the object of faith is shifted from a central government to a kinda random group of fellow-users. It suffers from the same weaknesses as the tokens issued in the past in times of coin scarcity.
Eikka
5 / 5 (1) Jun 17, 2014
They only control the servers who these machines connect to.


And those servers either accept or decline the solutions computed by the pool, so in essence, they control the computers.

The problem here, as I understand is, exactly in the power to decide what is the offical "truth" about the blockchain. The majority decides which transactions are true and which are not by choosing which solutions they accept, so anyone holding more than 50% control of the ledger is in effect able to choose who can spend the coin.

"Miners pool their computing power to spread the financial risk of their operations", is totally inaccurate. They use a pool to make a steady stream of income instead of hoping their miner will someday "find a block" and therefore collect the reward.


But that's exactly what that means, and exactly what they said.
Deadbolt
3.7 / 5 (3) Jun 17, 2014
Maybe the secret to having decentralized currency is to constantly switch to a new one?

Of course, bitcoiners have invested in bitcoin now, but that's part of the problem; people are using it as a dodgy investment, more than they are using it as money. The way it is designed encourages hoarding. Arguably, it was never a currency to begin with, because it was too poorly designed.

I'd be interested to see a digitial currency that discourages too much hoarding, by only being valid for a while, sort of like a digital version of the freigeld from the freiwirtshaft system proposed in the 30s. Of course, that too would have to be carefully balanced to work. It seems like the next digital currency could do with some economists (and not fringe austrian ones) advising the programmers.
antialias_physorg
not rated yet Jun 17, 2014
Maybe the secret to having decentralized currency is to constantly switch to a new one?

A simple alternative could be to set up many such mining pools all over the world with an incentive to have equal amounts of people at each pool (and a prohibition for any individual to be associated with more than one and now ownership connections between them).
Dr_toad
Jun 17, 2014
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krundoloss
not rated yet Jun 17, 2014
I feel like no matter how much I read about it, I just don't fully understand Bitcoins and how they have value. And as computers get more powerful, wouldn't their value go down? If there is a limited number of them, wont they just get split up too much? Why have them in the first place? Doesn't it just create more problems with theft and black market transactions? Would not a successful quantum computer render them useless instantly? Sound like a bubble just waiting to burst and weaken the world economy even further.
ppsp5
not rated yet Jun 17, 2014
I feel like no matter how much I read about it, I just don't fully understand Bitcoins and how they have value. And as computers get more powerful, wouldn't their value go down? [...]


The mining difficulty is adjusted constantly to compensate for increasing hashing rate. Each bitcoin can be divided into 10 million units called "satoshis", so there will always be enough. Why bitcoin? Because it's decentralised, trustless and convenient, removing the need for a 3rd party like a bank or a credit card company for value storage and transactions. But of course people don't realise how inconvenient and inefficient our current system is until they try bitcoin. Sending BTC is like sending an e-mail, they can send to your public address but your password is needed to send from your address. Also, fees are extremely low compared to any transaction system. And finally the protocol can be modified to be quantum computer compatible.
ThomasQuinn
not rated yet Jun 18, 2014
Trustless? Not true. Since BitCoins represent no inherent value, they are based purely on trust, but not trust in the credit-worthiness of an institution, nation or federation. They are based on trust in essentially a random group of BitCoin users. BitCoin is EVEN MORE fiduciary in basis than any common currency in use today.

I increasingly get the impression that the people who talk loudest about people who distrust BitCoin not understanding currency are themselves lacking the most basic understanding of the workings of fiduciary currency.

BitCoin doesn't work, and it's not going to. There is money to be made off it, but only by eventually duping others. BitCoin can lose its value much, much quicker than any state-backed currency. In fact, it's even more unstable than the private-issed tokens of the past.
Sikla
Jun 18, 2014
This comment has been removed by a moderator.