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Summary:

Last Friday, bitcoin mining pool GHash reached 51% of the network mining power. This could have had devastating consequences if misused, but a week later, it may have caused more good than bad.

In this week’s bitcoin review, we take a look at the differing opinions on whether a mining pool reaching the majority share of the network power is really doomsday for the bitcoin community.

Last Friday, it seemed like the bitcoin doomsday scenario might come true. One anonymous mining pool, GHash.IO, had reached 51 percent of the networking power for sustained periods, according to Cornell researchers Ittay Eyal and Emin Gün Sirer. Bitcoin is created from mining, where miners run software to solve math problems and are issued bitcoins in exchange. To increase the odds of solving the problem fastest, miners buy special chips to increase the power and therefore their rate of solving. But as bitcoin has become popular, the problems have become harder to solve individually. Groups of miners have joined pools, like GHash, to combine their power and increase the number of bitcoins they can mine. Pool members are then rewarded according to the amount of power they supply.

The threat that lies with one pool contributing 51 percent of the network power is that miners are also responsible for confirming transactions on the blockchain. Any time a transaction occurs on the blockchain, all of the computers have to chime in and say “yes” before it goes through. So, if a pool was at 51 percent, it could “vote” and say “no” to a transaction to a smaller mining pool and keep 100 percent of the mining rewards to itself, effectively controlling the supply of bitcoin.

In Eyal and Sirer’s summary of what they called “Armageddon”, they highlighted what could happen if a mining pool like GHash reached 51 percent of the network power, including double spending bitcoins and collecting all of the freshly mined coins:

It’s critical to note that there is a difference between having 51% of the mining power, and launching a 51% attack. An honest, benign 51%er (and we’d expect GHash to be on their best behavior in the next few weeks to not spook everyone) will continue to operate normally. But 51%er can turn dishonest at any moment, for there is a huge difference between someone who only holds 49% of the revenue, and someone who holds 51%. … A 51%er can collect 100% of the mining rewards. In addition, they can reject every block found by competing miners and selectively drive them bankrupt. They can reject selected transactions. They cannot take away your Bitcoins but they can make certain addresses unspendable. And that allows them to extort any mining fee they like. They are a de facto monopoly.

The core of the problem is that bitcoin’s decentralized status is no longer true once someone owns 51 percent of the power. The community as a whole has to trust one single entity to remain dormant and not attack the network, which would let them double spend bitcoins and become a centralized money source — two things that would completely undermine the spirit and purpose behind bitcoin’s founding. (For a more in-depth explanation of the attack, Ars Technica and Vox both have good articles).

So, was this the end of the world? The short answer is no, although there is a long term threat that shouldn’t be ignored.

I spoke to many people in the industry this week who wouldn’t talk on the record but said they weren’t concerned by the events. While many acknowledged that some risk was there, they believed that a mining pool would not purposefully destroy bitcoin and the blockchain because, in the end, everyone would lose if the price plummeted. Not to mention the fact that the miners are also in the pools for economic incentives, so they wouldn’t stay in a pool if it posed a danger to their finances. (In fact, many miners did just this and jumped ship from GHash, including BitFury.)

As of 11a.m. PST, GHash had fallen to control approximately 35 percent of market pool power, according to Blockchain.info.

Bitcoin mining pool power

Bitcoin evangelist Andreas Antonopolous posted publicly on Twitter that he was not concerned by the events, citing similar reasons to our industry sources:

Gavin Andresen, chief scientist at the Bitcoin Foundation, also released a statement that while Ghash reaching this level of network power wasn’t good, it “isn’t disastrous either.” He urged miners to move to smaller mining pools as the community works toward finding a solution: one that is technical or behavioral, or both.

For its part, GHash responded that it is open to discussion on how to fix what was happening. The mining pool had previously released a statement in January that it was taking actions to prevent controlling the 51 percent, including a temporary halt on accepting new miners and allowing people who want to use the CEX.io exchange to use other mining pools.

Some new ideas have already sprung up to fix some of the issues identified by this event. The Cornell researchers have proposed a technical fix, a “two-phase proof of work” that would disincentivize large mining pools while protecting individuals investments in mining hardware. Meanwhile, other people have taken to Medium, Reddit and Bitcoin Talk forums to propose new ideas.

What was potentially a disaster might lead to new opportunities and a better designed bitcoin — something that the cryptocurrency clearly needs after this scare. As Gavin Andresen said in his statement: “Bitcoin is still a work in progress, and you should only risk time or money on it that you can afford to lose.”

The market this week

When it comes to price, bitcoin still had its highs and lows this week, but nothing catastrophic brought on by the 51 percent news. The price was briefly hanging above the $600 threshold before closing Thursday night at $592.26. The price remained around that level into Friday morning where it was $590.23 at 12:00pm PST.
coindesk bitcion chart june 19
For background on why we’re using Coindesk’s Bitcoin Price Index, see the note at the bottom of the post. 

In other news we covered this week:

Here are some of the best reads from around the web this week:

  • It looks like Mark Karpeles, CEO of beleaugured exchange MtGox, is back online and tweeting about the Japanese weather, food and public transit systems. He’s directed a few angry tweeters to the MtGox webpage for updates, as the court case continues to move through the system in the US and in Japan.
  • So what’s the emoji for bitcoin? The release this week of 250 new emoji in the Unicode update, including everyone’s favorite middle finger emoji, didn’t include an icon for bitcoin. Because, well, no one has decided on one. The Bitcoin Foundation is now looking for volunteers to join its standards committee, whose job would include coming up with a unicode symbol to represent the cryptocurrency.
  • Julian Assange revealed in a Reddit AmA that he had a secret meeting with Google Chairman Eric Schmidt in April 2013 where he advised him to get into bitcoin: “Fortunately he didn’t listen, or else he’d own the planet by now.” The transcript of that meeting was of course leaked so you can read all of Assange’s comments to Schmidt here.
  • “Bitcoin Jesus” Roger Ver is helping you buy St. Kitts citizenship…via bitcoin. Quartz reported that if you buy a share in a Marriott development, the government will throw in a passport and citizenship.

Bitcoin in 2014

 

The history of bitcoin’s price

A note on our data: We use CoinDesk’s Bitcoin Price Index to obtain both a historical and current reflection of the Bitcoin market. The BPI is an average of the three Bitcoin exchanges which meet their criteria: Bitstamp, BTC-e and Bitfinex. To see the criteria for inclusion or for price updates by the minute, visit CoinDesk. Since the market never closes, the “closing price” as noted in the graphics is based on end of day Greenwich Mean Time (GMT) or British Summer Time (BST). 

Photo from Carlos Amarillo/Shutterstock