Read now to learn how the Bitcoin blockchain is resistant to attacks against its mining infrastructure.
The Proof-of-Work (PoW) consensus mechanism is one of many features that sets Bitcoin apart from any other settlement network that came before it. Through PoW, thousands of high-powered computers around the world convert electricity into processing power in order to help confirm Bitcoin transactions on the blockchain. In no small way, the Bitcoin blockchain would be doomed to fail if not for the breakthrough of PoW.
That said, PoW is not without its critics. The main critique for the last several years has centered on the misunderstood negative environmental impacts of Bitcoin mining. However, another common refrain from Bitcoin detractors has touched on the growing centralization of Bitcoin mining operations.
I recently read a piece () on the topic of mining centralization from Bob Burnett, a Bitcoin mining magnate and contributor to Bitcoin Magazine. In the article, Bob describes a so-called “nightmare scenario” that he believes presents a remote, but existential risk to the Bitcoin blockchain. To summarize the pertinent facts, the nightmare scenario consists of the following:
Hash power on the Bitcoin blockchain becomes so centralized, that ~85% or more is controlled by only a few dozen entities.
A “consortium of nation states coordinates a hostile shutdown” of the entities controlling the supermajority of the network hashing power.
Block confirmation times slow as a result, so much so that the average block time greatly surpasses the ten minute goal and the difficulty adjustment period lasts much longer than two weeks.
One can begin to understand the gravity of this hypothetical scenario, especially if we consider the possibility that the attackers could launch the same attack on the network over and over. Per Bob’s article, the primary impacts of the nightmare scenario are 1) slower block times leading to fewer transaction confirmations, and 2) a decline in the amount of new Bitcoin issued as a result of less frequent block rewards.
Counterpoints to the Nightmare Scenario
The article presents an intriguing dilemma and makes a solid case for more hobbyists and retail operators getting into mining and node operation. That said, I’m of the opinion that the nightmare scenario also heavily discounts factors that would mitigate the impact of such an attack on the Bitcoin blockchain:
Reduced Transaction Capacity
Even under normal operating conditions, Bitcoin’s layer-1 blockchain is not known for its high transaction throughput, confirming on average around 250,000 transactions per day. Under the conditions described in the nightmare scenario, the transaction throughput of the base layer blockchain would be decimated, and only a few thousand transactions per day would be confirmed.
While certainly detrimental, I believe that the impact would be less than it might initially appear. After all, a lot more than ~250,000 daily Bitcoin transactions happen already. The other transactions just aren’t publicly visible because they happen through other channels, like on crypto exchanges, within crypto banks, and on layer-2 solutions like the Lightning Network
I believe that the amount of Bitcoin transactions that happen outside of the layer-1 blockchain is set to grow exponentially as hundreds of millions of new participants enter the ecosystem. Don’t get me wrong: I’m a huge proponent of self-custodying one’s Bitcoin and recent events have taught us that governments and financial institutions are happy to censor your money. Even so, the reality is that most people in today’s world, especially in developed economies, are still perfectly happy to entrust custody of their money to a third party.
While bad for censorship-resistance, off-chain transaction capacity significantly reduces the impact of limited transaction capacity as a result of the nightmare scenario.
Bitcoin Issuance Rate
Like all currencies to date, Bitcoin does incorporate an issuance mechanism that introduces new Bitcoin into circulation. However, unlike any other currency, Bitcoin’s total supply is capped and the cap can effectively never change or be removed.
Currently, 6.25 new Bitcoin are issued with each confirmed block of transactions. But in Bob’s words, the nightmare scenario would do the following to the Bitcoin issuance rate:
New bitcoin would be entering circulation at a snail’s pace because money supply increases are completely dependent on the mining of blocks.
He goes on to insinuate that the reduced amount of new Bitcoin in circulation would severely impact the functionality of the Bitcoin ecosystem. In other words, he seems to identify with the common misunderstanding that currency inflation is somehow necessary for economies to function properly.
The purpose of our discussion today is not to address the atrocity that is currency inflation. Suffice it to say that inflation is far from positive under any stretch of the imagination. Bitcoin is a godsend in that it completely does away with inflation once the supply cap is reached. At that point, the Bitcoin economy will continue to operate without error since Bitcoin are extremely subdivisible, allowing for infinitesimal transactions without requiring the plague of currency inflation.
The Whole Picture
It certainly is important that we each do our part to help avoid centralization of miners and nodes on the Bitcoin blockchain. Ultimately though, Bitcoin already includes robust incentives defending the network from a variety of attack vectors, and more improvements are being researched every day.
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