Bitcoin Cash experienced some mining issues recently, with what is reportedly a single actor controlling a majority of the hashrate, as well as serious fluctuations with how fast blocks have been produced. Naturally, Bitcoin maximalists have been gleeful to pile on and criticize. That’s too bad, because if I were a maximalist, I’d be pretty terrified right now about what something like this shows can happen to Bitcoin.
1/ After looking deeper into this issue, there is *enormous cause for concern* as the entity in question on the Bitcoin Cash blockchain essentially has full control over the chain at this point in time. (thread) https://t.co/chTqhAE6ox
— hash.fail (@ZeroNoncense) October 26, 2019
In a low-usage speculative market, lagging price can kill security
The profit that cryptocurrency miners make is largely dependent on the price of the coin they mine, as that emission tends to have a fixed total rate. When market price lags, it affects the profitability of mining on, and therefore securing, the chain. Naturally, if it’s less profitable to mine, fewer actors will do so, leading to reduced network security. This doesn’t necessarily mean that the total hashrate will plunge, but fewer actors will be willing to mine at a loss, and that means more hashrate concentrated into fewer hands. During a roaring bull market, the kind of hashrate centralization we’ve seen on Bitcoin Cash today would be much less likely, since more people would be competing for a piece of the pie.
Now, with high usage for economic transactions we have a different story. The market price can crash yet total transactions go up, delivering more in fees to miners and countering the effect of a reduced value from the regular block reward. In cases where fees price out some types of transactions, a drop in the cost of those fees can open up new opportunities to use the network, generating more use and therefore more profits. We’re seeing a constantly growing Bitcoin hashrate because its use, while artificially capped with the block size, remains high, and Dash’s growth in real-world use may similarly explain why its hashrate has significantly outperformed its price versus top competitors.
It’s worth noting that Bitcoin maximalists have not prioritized allowing more than the current on-chain limit of transactions to take place. This means that even with a sharp dip in price there’s a hard limit on how many people can transact, meaning that the “transaction fee firesale scenario” described above won’t be viable. Because of this Bitcoin will always have a security vulnerability to sustained price crashes where miners can no longer afford, or have no desire, to mine at a loss. Its speculative nature hurts its security.
We’re finding out just how fragile the state of mining can be
The Bitcoin Cash mining issue also drew light on problems with difficulty adjustment. That lone largest miner produced blocks significantly faster than the network should be putting out, then the network went hours without producing a block. The culprit is likely an adjusted mining difficulty algorithm, which was made necessary by the huge swings in hashpower following the initial split from Bitcoin… which, itself, shows how poorly the Bitcoin network would function if such a dramatic hashpower swing happened. Many years ago Dash implemented Dark Gravity Wave which readjusts difficulty every block, but I have yet to see any talk of implementing something similar on Bitcoin or its forks.
Worse, we’re seeing that in some situations, hashpower can become less distributed, not more, over time and as the network matures, meaning that in some cases the entire point of having miners can become moot. Even with Bitcoin, whose mining remains relatively decentralized on paper, the vast majority of the network’s mining power is concentrated in China, meaning that a hostile state actor can effectively compromise the network if it so desired. Dash attacks this by leveraging a different set of collateralized nodes (which also are hosted in a different geographic distribution than its hashpower) to help miners in securing the network, but any proof-of-work cryptocurrency that isn’t in the constant process of evolving will end up being subjected to some serious vulnerabilities.
All it takes is the right spark to set the whole thing ablaze
Despite all this, nothing cataclysmic has happened to Bitcoin or other top cryptocurrency. Yet. But the fact that it could should be terrifying. All it takes is one serious incident to either cause people to become scared, or to embolden a potential attacker into trying something really big. If I were a maximalist all in on Bitcoin right now, I’d be terrified right about now.
