Bitcoin’s Rules Might Reward Self-Interest a Little Too Much

Bitcoin's got problems—big ones, too. A couple of academic analyses have identified two potentially fatal flaws in the much-hyped system of digital currency, Tom Simonite reports for MIT's Technology Review. The problem: under the rules as they're currently written, the interests of individual users will soon diverge from the interests of the community as a whole.

Bitcoin's rules are, in theory, relatively simple. New bitcoins are produced by a process known as “mining,” in which computers solve complex mathematical equations. When the calculation is complete, the user who controls those computers earns some coin.

On the one hand, this means that anyone with an internet connection and a computer can set up shop. In reality, though, says Simonite, bitcoin mining is dominated by a small cluster of “mining groups.” And if one group begins to dominate, it can cheat the system: "a miner controlling 51 percent of all bitcoin mining power could tamper with the blockchain to do things like spend bitcoins twice," Simonite writes. One Chinese mining group, known as G.Hash, already controls 29 percent of all the computing power used to run bitcoin calculations.

And even at that level of dominance, having a lot of computing muscle changes the game:

Bitcoin miners run software that races to solve a mathematical puzzle and thereby add the next section to the blockchain, netting the reward that comes with it. Under the selfish-mining strategy, a mining operation would refrain from announcing it had completed the next new block, shunning the reward in an attempt to get a head start on the competition on the following block.

The Cornell analysis shows that although selfish miners do worse initially, the strategy can pay off over time by causing honest miners to waste time on puzzles that are irrelevant.

The other flaw with the system, Simonite reports, is that, once it gets harder to mine new coins, there won't be any incentive to devote computer power to buying and selling the old ones.

To maintain the currency's value the number of bitcoins allowed in circulation will cap out at 21 million. As the total inches closer to this upper limit, the reward for running bitcoin calculations slowly drops. There's a crossover point, Simonite explains, where it just isn't worth it to play anymore. The same computers that mine for bitcoins also keep the buying and selling infrastructure running, and there was supposed to be a way to make enough profit from those transactions, too. But in practice, that secondary profit hasn't materialized, and, as the bitcoin vein gets closer to being tapped out, the system for trading the coins could slowly fall apart, too.

Colin Schultz | | READ MORE

Colin Schultz is a freelance science writer and editor based in Toronto, Canada. He blogs for Smart News and contributes to the American Geophysical Union. He has a B.Sc. in physical science and philosophy, and a M.A. in journalism.