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Bitcoin: Network Security



SUMMARY


The Bitcoin network is secured through mining, a process that validates transactions on the network while coining new Bitcoin. Mining also ensures that no single entity has control over the blockchain or the protocol that controls it. This makes Bitcoin resistant to being controlled (or shut down) by a government or central authority. In this article, we discuss the security design of the Bitcoin network and the risks it poses. If you want to read about other aspects of Bitcoin, you should check out our other articles, including Bitcoin: Basic Technical Design and Bitcoin: Origins and Cultural Significance.



CONTENT

  • The role of Bitcoin mining

  • Risk: 51% attack

  • Risk: Centralisation of mining

  • Risk: Hard forks

  • Risk: Attacks on quantum computers


THE ROLE OF BITCOIN MINING


Bitcoing is a major breakthrough in computing that simultaneously mint Bitcoin and validates transactions on the Bitcoin network. Here's how it works: computers on the network - called "miners" - compete to solve a computationally intensive proof-of-work (PoW) puzzle. The first miner to find a solution that is accepted by the majority of miners gets to write a "block" of new transactions into the "blockchain" - the distributed Bitcoin ledger. As a reward for their efforts, they receive a predetermined amount of newly minted Bitcoin, called the "block reward". This competition lasts about 10 minutes and once a solution is found and accepted by at least 51% of the miners, it starts all over again. Since it takes work (i.e. energy) to unlock the block reward, there is a real cost to generating Bitcoin, similar to gold mining. This cost gives bitcoin value.


Transaction data is one of the pieces miners use to solve the PoW puzzle. If a miner does not use valid transactions, the other miners cannot agree on the solution because they are working with a different transaction data set. This means they will not allow him to write a new block to the blockchain and win the block reward. All the computing power he spent on finding a solution would have been for nothing. Therefore, there is a strong incentive for a miner to stay honest and use valid transactions. So the cost of mining not only creates dgital scarcity, but also helps to secure the Bitcoin network.



RISK: 51% ATTACK


If a miner claims the majority of the Bitcoin network's computing power (hashrate), they could spend their Bitcoin more than once - the problem of double spending. This is called the 51% attack. The Bitcoin network solves this problem through incentives. First, its security scales exactly with the bitcoin price. When the price rises, it creates an arbitrage opportunity for blocks. This incentivises rational, economically motivated miners to use additional computing power to solve the PoW puzzle, which in aggregate equals the increased value of the block reward - no more, no less. Since this arbitrage opportunity induces miners to provide more computing power to the network, and hashrate is expensive, it consequently becomes more expensive for a miner to perform a 51% attack when the bitcoin price increases.


Second, even if a miner can acquire much of the network's total hashrate and overcome the figurative proof-of-work energy wall, it has a strong incentive to play nice. This is because bitcoin mining is a capital-intensive and highly specialised activity (see below). To win the block reward (let alone achieve majority hashpower), a miner must invest in highly customisable hardware and chips - application-specific integrated circuits (ASICs) - built for a single, extremely rare goal: cracking the SHA-256 hash algorithm of the Secure Hash Algorithm 2 (SHA-2) family. And like a drag racer, they are not easily reused.


A rational economic actor invested in this computer arms race will always choose to win the block reward rather than throw it all away. Using hashpower to significantly impact, disrupt or hack the Bitcoin network's blockchain would most likely destroy most, if not all, of Bitcoin's value, wiping out the miner's investment and any future gains. Apart from a comic book villain like the Joker, it is hard to imagine anyone with this combination of resources, skills and nihilism.



RISK: CENTRALIZATION OF MINING


As mentioned earlier, bitcoin mining has become a capital-intensive and highly specialised activity. The incentive structures make it profitable to play by the rules and prohibitively expensive to deviate. Therefore, many in the Bitcoin community do not find it problematic that Bitcoin mining is concentrated among fewer and larger players.


However, if much of the network's hashrate is concentrated in one or a few jurisdictions, the potential for a government or cooperating governments to interfere increases. If a government simply banned Bitcoin, the government would shut down miners in its sphere of influence and the Bitcoin network would continue unchallenged, albeit at a lower overall hashrate, at least in the short term. A more worrying scenario would be if a government instead forced miners to censor transactions. This could affect Bitcoin's fungibility and permission-free promise. In this case, however, the community would be expected to split Bitcoin, retain the current, unadulterated blockchain, and introduce a new consensus mechanism that is more resistant to miner centralisation and associated government interference and manipulation.



RISK: HARD FORKS


Bitcoin is special in that it is decentralised - identical copies of the blockchain are hosted on computers around the world called "nodes" - and therefore not controlled by any one person or company. But the decentralisation of the network (i.e. resistance to censorship) comes at a price. The two main trade-offs are the number of transactions the network can process (throughput) and transaction speed (latency). The Bitcoin network can process up to one megabyte of transaction data every 10 minutes or so. A centralised network (e.g. Visa) can achieve much higher throughput and lower latency, but is very vulnerable to censorship and lacks peer-to-peer character.


This decision is based on the deeply held belief that a smaller block size will result in more nodes participating in the network because hosting a full copy of the blockchain requires less computing power and storage resources. The larger the number of Bitcoin nodes, the more decentralised the network.


So far, the Bitcoin community has resisted attempts to increase the block size beyond one megabyte, but not without controversy and uproar. In 2017, tensions boiled over and the community split on the issue. The result was the controversial Bitcoin Cash Hard Fork, which produced a new, incompatible blockchain with a block size of eight megabytes. Even though the majority of the Bitcoin community continues to value decentralisation above all else, there is always the possibility that the community will disagree on this or another design decision in the future, which could lead to a part of the community doing a hard fork out of disagreement.


However, there are projects like the Lightning Network that are working to increase Bitcoin's transaction throughput and reduce latency while maintaining the decentralised nature of the system. It is still early days, but if this or any other project is successful, it could dramatically change the payment history of the Bitcoin network and bring the best of both worlds.



RISK: ATTACKS FROM QUANTUM COMPUTING


Quantum computing is a potential threat to the public-key cryptography that Bitcoin currently uses for its security. However, there is also good news. There is already post-quantum cryptography that is resistant to quantum computing attacks. And since Bitcoin is software, it can be upgraded and switched to these post-quantum algorithms at any time. Moreover, a real quantum threat will likely be detected well in advance, giving Bitcoin enough time to adapt. However, if such a threat were to occur overnight, the world would have far greater concerns than the security of the Bitcoin network itself. For example, all military satellites and command and control systems would be vulnerable. Therefore, it is expected that there will be a global effort to find a solution.

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