Bitcoin Is Broken

The Blockchain

The key idea behind Bitcoin's success is a decentralized protocol for maintaining a global ledger, called a blockchain. The blockchain records transactions between Bitcoin addresses, tracking the movement of every Bitcoin as it changes hands. This tracking ensures that no one can double-spend a coin, as the ledger makes it all too apparent whether a user sent out more Bitcoins from his account than he earned. The particular way in which Bitcoin tracking is performed makes sure that the record is also immutable; once a Bitcoin transaction is committed and buried in the blockchain, it is difficult for an attacker to reverse the transaction, so that a merchant can ship goods in good conscience, assured that the transaction will later not be reversed.

This protocol works through a process called mining. In essence, the ledger is organized into a single, ordered sequence of blocks, each of which records a set of transactions. Each block contains a crypto-puzzle, a computationally difficult challenge akin to a CAPTCHA. Miners organize themselves into a loosely-organized, distributed network, and they all concurrently try to add a new block to the ledger. To do this, they need to discover the solution to a crypto-puzzle, formed by the contents of the ledger until the point where the new block is being added. Solving a crypto-puzzle is hard work; a computer has to plug in many different values and see if they solve the crypto-puzzle posed by the new block. The puzzles are such that a home computer working alone will take many years to solve a crypto-puzzle. Some people use GPUs to speed up this process, while others have invested in custom ASICs designed to solve Bitcoin crypto-puzzles.

Of course, this process is not free, as the process of solving these crypto-puzzles consumes power and requires cooling. For the currency to be viable, the miners need to be compensated for their efforts. Bitcoin miners are compensated through two mechanisms: they collect the transaction fees from the transactions recorded in the new block they contributed to the block chain, and they also collect a lump sum fee. This lump sum fee creates new Bitcoins, according to a time-varying formula. Hence, "mining" is similar to digging for gold -- every now and then, a miner is rewarded with a nugget. The difficulty of crypto-puzzles are automatically adjusted such that a new block is added to the ledger approximately every 10 minutes, which ensures a predictable coin generation rate for the system, which stems inflation and makes the currency supply more predictable than it would be otherwise.

The nice thing about having crypto-puzzles that are so difficult is that it is not practical for an attacker to modify the ledger. Someone who wants to, say, buy something from a Bitcoin merchant, get the goods shipped, and then later change that block to erase the transfer of money to the merchant, faces a very difficult task: they need to find alternative solutions to cryptopuzzles for that block and every subsequent block. What makes this difficult is that the main bulk of the miners will be working hard on adding new blocks at the tail end of the ledger, so an attacker, with limited resources, cannot hope to find alternative solutions for all the past blocks and catch up to the rest of the miners.

Miners today organize themselves into groups known as pools. A pool will typically consist of a set of cooperating nodes that share their revenues whenever they find blocks. Mining pools are kind of like the shared tip jar at a restaurant: on occasion, a miner will hit the potluck, discover a good solution to a cryptopuzzle, and rake in some revenues, kind of like a waiter who lands a big table that runs a large tab. Since this occurs relatively infrequently from the point of view of any given miner, sharing the proceeds enables the miners to have more predictability in their lives.

The Attack

The honest Bitcoin protocol assumes that all miners engage in a benign strategy where they quickly and truthfully share every block they have discovered. Until now, everyone assumed that this was the dominant strategy; no other strategy was known that could result in higher revenues for miners.

Our work shows that there is an alternative strategy, called Selfish-Mine, that enables a mining pool to make additional money at the risk of hurting the system. In Selfish-Mining, miners keep their block discoveries private to their own pool, and judiciously reveal them to the rest of the honest miners so as to force the honest miners to waste their resources on blocks that are ultimately not part of the blockchain.

Here's how this works in practice. Selfish miners start out just like regular miners, working on finding a new block that goes at the end of the blockchain. On occasion, like every other miner, they will discover a block and get ahead of the rest of the honest miners. Whereas an honest miner would immediately publicize this new block and cause the rest of the honest miners to shift their effort to the newly established end of the chain, a selfish miner keeps this block private.

From here, two things can happen. The selfish miners may get lucky again, and increase their lead by finding another block. They will now be ahead of the honest crowd by two blocks. They keep their new discovery secret as well, and work on extending their lead. Eventually, the honest miners close the gap. Just before the gap is closed, the selfish pool publishes its longer chain. The result is that all the honest miners' work is discarded, and the selfish miners enjoy the revenue from their previously secret chain.

The analysis of revenues gets technical from here, and the only way to do it justice is to follow along the algorithm and state machine provided in our paper. But the outcome is that the selfish mining pool, on the whole, nullifies the work performed by the honest pool through their revelations.

The success of the attack, and the amount of excess revenue it yields, depends on the size of the selfish mining pool. It will not be successful if the pool is below a threshold size. But this threshold is non-existent in the current implementation -- selfish mining is immediately profitable. Our proposed fix raises the threshold to 25% if universally adopted. And, while there may be other fixes, no fix can raise it above 33%. So, at least 2/3rds of the Bitcoin miners have to be honest. All three of these findings are a far cry from the 50% previously (and falsely) believed to protect the currency.

The Implications

The selfish mining strategy has significant implications for the Bitcoin system:

• The members of a selfish mining pool will earn more revenue than honest participants: This means that rational, self-interested miners, who typically invest significant amounts of money in their rigs, will want to join selfish miners instead of follow the honest strategy.
• Once launched and successful, selfish mining pools will grow in size: There are no mechanisms in place to exert any kind of pressure to break up a selfish mining pool.
• Selfish mining is harmful to the Bitcoin community: Selfish miners bring down revenues for everyone. The fact that a selfish mining attack can be launched, and a selfish pool can grow in size until it controls the currency, is a deterrent to people, like the Winklevii, who are drawn to the decentralized nature of Bitcoin.
• This attack is practical right now with any size mining pool: Anyone can launch this attack successfully right now, and make revenues in excess of what they would otherwise make.
• Under the best theoretical conditions, Bitcoin requires at least 2/3rds of the miners to be honest: It was previously believed that the Bitcoin ecosystem was safe as long as a majority were honest. Our analysis shows that this is wrong. If a selfish-mining pool were to command 1/3rd (33%) of mining power, it'll always be in a position to make excess revenues over honest miners.
• We propose a practical fix that will protect against selfish mining as long as pools command below 25% of the mining power: The fix is simple to apply. It would be a good idea for the Bitcoin community to adopt it.
• There are mining pools in existence that can conceivably launch successful selfish mining attacks: At the moment, any mining pool can launch a successful mining attack. With our proposed fix, only pools above 25% can launch the attack, but there exists a pool of this size right now. And there have even been pools that commanded more than 33% of the mining power in the past.

FAQ

Some frequently asked questions:

• What happens when a selfish mining group is formed?

Once a group of selfish miners appear on the horizon, rational miners will preferentially join that mining group to obtain a share of their higher revenues. And their revenues will increase with increasing group size. This creates a dynamic where the attackers can quickly acquire majority mining power, at which point the decentralized nature of the Bitcoin currency collapses, as the attackers get to control all transactions.

• When a single pool controls the currency, does the value of a Bitcoin go to $0?

No. It all depends on how the controlling group runs the currency. But the decentralization, which in our view is so critical to Bitcoin's adoption, is lost. It would not be at all healthy for the Bitcoin ecosystem.

• Does this affect X, where X is another cryptocurrency?

Probably. It affects every currency system that is inspired by Bitcoin's blockchain. That includes Litecoin, PPcoin, Novacoin, Namecoin, Primecoin, Terracoin, Worldcoin, and a host of other currencies that share the same global ledger concept.

• What's the core discovery here?

We're the first to discover that the Bitcoin protocol is not incentive-compatible. The protocol can be gamed by people with selfish interests. And once the system veers away from the happy mode where everyone is honest, there is no force that opposes the growth of really large pools that command control of the currency.

• Is selfish mining happening now?

We cannot know for sure, but we suspect not. Ours is the first work to publicly investigate an alternative mining strategy.

• What's with these two separate thresholds? Do 2/3rds of the nodes have to be honest? Or 3/4ths? Why is there a gap between the two?

At the moment, the threshold is non-existent. With our proposed fix, which is practical and easy to deploy, it gets raised to 25%; i.e. 3/4ths of the network must be honest. Perhaps someone can propose a fix that raises this threshold further, but we have shown that they cannot raise it above 2/3rds.

• Would we be able to tell a selfish mining pool from any other pool?

Not easily. A selfish mining pool can hide behind throwaway addresses to mask its identity. And while the timing of block revelations does look different for selfish miners, it's difficult to tell who was genuinely first, as near-concurrent revelations will arrive in different orders at hosts.

• Is there a danger associated with making this attack public?

The only way to protect the system against selfish mining attacks is to get everyone to change their implementations. So the only way we can protect the system is by publicizing the potential attack. We have chosen not to launch the attack ourselves, because we care about the long-term viability of the currency.

• Can Bitcoin remain a viable currency?

Probably. We have shown that as long as selfish miners are below a certain threshold, they will not succeed. And while this threshold does not exist yet (i.e. selfish mining will immediately yield benefits for any sized pool), we have a proposed fix that raises the threshold to 25%.

Addendum, November 14, 2013

Followup post on frequently-asked questions

Followup post on the novelty of the selfish mining attack

Followup post on altruism among capitalists

Followup post on response to feedback on selfish mining

Addendum, February 28, 2014

Haldane says that there are four stages of acceptance to new ideas:

1. This is worthless nonsense.
2. This is an interesting, but perverse, point of view.
3. This is true, but quite unimportant.
4. I always said so.

The comments below, coming from "Bitcoin entrepreneurs", organized into a brigade, exhibit all four of these stages at the same time. I have preserved them as they are (except for deleting profanity-laced comments), to shame the community. In some cases, the commenters edited their own comments when proven wrong, so reading the comment chains may seem non-sensical at times as a result.