Bitcoin: Network Security
Bitcoin mining is an elegant validating process that secures the network, processes transactions, supports consensus, and mints new bitcoins all at the same time. Proof of Work provides a huge financial incentive for miners to stay honest, as well as a structure that promotes trust in the Bitcoin network in many ways.
Mining, a procedure that validates network transactions while also minting new bitcoin, protects the Bitcoin network. Bitcoin is also resistant to being controlled (or shut down) by any government or central authority since mining ensures that no single entity controls the blockchain or protocol that governs it.
We’ll talk about the Bitcoin network’s security design and the threats it mitigates in this article. Check out our other articles on Bitcoin, such as Bitcoin: Fundamental Technical Structure and Bitcoin: Origins and Cultural Significance, if you want to learn more about the currency.
- The Role of Bitcoin Mining
- Risk: 51% Attack
- Risk: Mining Centralization
- Risk: Hard Forks
- Risk: Quantum Computing Attacks
The Role of Bitcoin Mining
Cryptocurrency mining is a groundbreaking computer science achievement that mints bitcoin while also validating transactions on the Bitcoin network.
The following is how it works: The network’s computers, referred to as “miners,” compete to solve a computationally expensive proof of work (PoW) challenge. The first miner to find a solution that is acceptable by a majority of miners is allowed to add a “block” of new transactions to Bitcoin’s distributed ledger, known as the “blockchain.”
She is rewarded with a predetermined quantity of newly minted bitcoin known as the “block reward” in exchange for her services.
This competition takes approximately 10 minutes and once a solution is found and accepted by 51% or more of the miners, it starts again. Because it takes work (i.e., energy) to unlock the block reward, there is a real cost associated with creating bitcoin, akin to mining gold. This cost gives bitcoin value (per the labor theory of value, not the subjective theory of value) and digital scarcity.
Transaction data is one of the pieces miners use to solve the PoW puzzle. If a miner does not use valid transactions, other miners will be unable to reach consensus on her solution because they will be working off of a different transaction data set.
This means they will not agree to allow her to write a new block to the blockchain and win the block reward. All of the computational power that she dedicated to finding a solution will have been in vain. Therefore, a miner is strongly incentivized to stay honest and use valid transactions lest she expend her precious resources for naught.
As such, the cost of mining not only creates digital scarcity, but also helps secure the Bitcoin network.
Risk: 51% Attack
The double-spending problem occurs when a miner obtains a majority of the Bitcoin network’s processing power, or hashrate, as it is measured.
A 51 percent attack is what it’s called. Incentives are used by the Bitcoin network to solve this problem. To begin with, its security increases in lockstep with the price of bitcoin. A block reward arbitrage opportunity develops as the price rises. This will encourage the sensible, profit-driven miner community to devote more processing power to solving the PoW problem that is proportional to the increased block reward amount – no more, no less.
Because this arbitrage opportunity encourages miners to contribute more processing power to the network, and hashrate is expensive, it follows that a 51 percent attack will grow more expensive as the price of bitcoin rises.
Second, even if a miner is able to gain a majority of the network’s aggregate hashrate and break through the figurative proof of work energy wall, she is handsomely rewarded for behaving well. This is due to the fact that Bitcoin mining is a capital-intensive and highly specialized endeavor (see below).
A miner must invest in highly customizable hardware and chips — application-specific integrated circuits (ASIC) — that are built to be great at one extremely rare objective:
crunching the SHA-256 hash algorithm of the Secure Hash Algorithm 2 (SHA-2) family. In order to win the block reward (let alone achieve majority hashpower), a miner must invest in highly customizable hardware and chips — application-specific integrated circuits (ASIC) — that are built to be great at They also can’t be recycled as easily as a drag racer.
A sensible economic player who has invested in this computer arms race will always prefer to win the block reward over tossing it all away.
Using hashpower to significantly co-opt, disrupt, or attack the Bitcoin network’s blockchain would almost certainly destroy the majority, if not all, of bitcoin’s value, therefore destroying a miner’s investment and any future gains. It’s difficult to imagine somebody with this combination of resources, competence, and nihilism besides a comic book villain like the Joker.
Risk: Mining Centralization
Bitcoin mining, as previously said, has evolved into a capital-intensive and highly specialized endeavor. The incentive structures make it profitable to follow the rules and prohibitively expensive to break them. As a result, many members of the Bitcoin community do not consider the fact that Bitcoin mining has shifted to fewer, larger players to be an issue.
However, if the majority of the network’s hashrate concentrates in one or a few jurisdictions, the chances of a government or cooperating governments interfering increase. If a country just bans Bitcoin, it will shut down miners inside its jurisdiction, and the Bitcoin network will continue to function normally, albeit with lower aggregate hashrate in the short term.
A more worrying scenario would be if miners were forced to censor transactions by the government. This could detract from bitcoin’s fungibility and ability to operate without the need for authorization.
However, if that happened, it’s likely that the community would fork Bitcoin, preserving the most recent pristine blockchain and adopting a new consensus method that was more resistant to miner centralization and any subsequent government infiltration and meddling.
Risk: Hard Forks
Bitcoin’s superpower is that it is decentralized, with identical copies of the blockchain housed on computers known as “nodes” all around the world, and hence not controlled by a single person or company. However, network decentralization (i.e., resistance to censorship) comes at a price.
The amount of transactions the network can process (throughput) and transaction speed are the two fundamental trade-offs (latency). The Bitcoin network can process up to one megabyte of transaction data every ten minutes on average.
A centralized network (for example, Visa) has far higher throughput and reduced latency, but it is very prone to censorship and lacks a peer-to-peer nature.
Because hosting a complete copy of the blockchain needs less processing power and storage resources, this design choice is driven by the strongly engrained assumption that a smaller block size leads in more nodes participating in the network. The more Bitcoin nodes there are, the more decentralized the network becomes.
The Bitcoin community has so far rejected calls to expand block sizes above one megabyte, but not without controversy and dissent.
Tensions reached a breaking point in 2017, when the community divided over the issue, resulting in the tumultuous Bitcoin Cash hard fork, which created a new, incompatible blockchain with eight-megabyte block size. While the majority of the Bitcoin community continues to prioritize decentralization, there is always the risk that the community will disagree on this or another design decision in the future, resulting in a hard fork in dissent.
With that in mind, efforts like the Lightning Network are attempting to improve Bitcoin’s transaction speed and latency while keeping its decentralized character. It’s still early, but if this or another initiative succeeds, it could drastically alter the Bitcoin network’s payment story and lead to the best of both worlds.
Risk: Quantum Computing Attacks
Quantum computing poses a threat to the public-key cryptography approaches that Bitcoin currently relies on to keep itself secure.
There is, however, some good news.
There is already post-quantum cryptography that is resistant to quantum computer threats. Because Bitcoin is a piece of software, it may be modified at any point to adopt these post-quantum techniques. Any serious quantum danger would also most likely be recognized approaching a long time in advance, allowing Bitcoin plenty of time to respond.
However, if such a threat materialized suddenly, the world would be much more concerned than the Bitcoin network’s security. All satellites and military command and control systems, for example, would be susceptible. As a result, it’s expected that a global effort with significant alignment will be made to discover a solution.