Reading Between the Bitcoin Headlines: Does China’s Mining Power Really Pose a Threat to the Bitcoin Ecosystem?
Originally published w/ PANews in November 2018
A recent study published by researchers from Princeton University and Florida University has claimed that “China is bitcoin’s number one threat” (citation with hyperlink). While the report is still in the process of peer review, it has captured the attention of tech and blockchain media outlets along with big names in the cryptocurrency industry.
These statements and media articles have focused on a provocative central notion: the presence of a large number of bitcoin miners in China. The research uses statistical analysis to answer whether the centralization of mining power in a nation with a central government does indeed pose a significant threat to the blockchain ecosystem.
A single entity controlling more than 51% or more of the computing power of the bitcoin network can be considered a significant threat because the consolidation of computing (or mining) power means that the bitcoin blockchain is no longer decentralized and immutable. This 51% threat is also known as a 51% attack.
In this piece, we walk you through the debate on the question of whether China poses a threat to the bitcoin networks from its early emergence in nascent crypto communities to its culmination most recently at a talk during San Francisco Blockchain Week.
A Brief on Blockchain Mining
Before delving into the question of whether there are reasonable grounds to fear the implications of the proliferation of computing power in China, we must first examine more generally the role of bitcoin miners in any network. If you’re familiar with the basics of blockchain, skip to the next section. Afterward, we can pose the question of whether mining power being consolidated in China can threaten the network.
Let’s get back to the basics: According to the bitcoin white paper, there are two key actors in the blockchain ecosystem — nodes (miners) and users. Both actors require hardware connected to the internet in order to access the bitcoin blockchain. The nodes — physical computers — validate transactions and then process them by logging them as blocks connected to each other to form a chain otherwise known as the bitcoin public ledger.
The task of building a block requires an immense amount of computing power (hashing power), also called Proof of Work (commonly known as PoW). As an incentive to execute PoW, nodes receive rewards in the form of transaction fees and in newly mined or “minted” bitcoins.
All nodes have a log of the entire chain to secure the network from a single point of failure and “as proof of the sequence of events witnessed”. The more nodes on the network, the less centralized and more “secure” the network is from external tampering. Users, of course, are those making transactions. Their identities remain private while their individual transactions remain on the public chain.
Due to this transparent, decentralized system, bitcoin cannot be controlled and manipulated “as long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers”. In other words, if any group of nodes is able to control more than 50% of the hashing rate they can then choose to collude to attack the system by manipulating it to double spend, deny or prevent transactions, this is called a 51% attack. Has this happened before? Almost. Is it happening again today? Possibly, because bitcoin mining nodes have consolidated their hash power into mining pools.
Mining pools are when miners direct and combine their hash power to share mining rewards. Miners do not need to be located in the same location to pool or share their hash power and can redirect their hash power at any time.
The centralization of mining pools in China is largely a result of its cheap water and low electricity costs, especially in the western provinces, along with its dominant share in the manufacturing of mining hardware.
More than 50% of mining pools are located in China (see Figure 1 and 2). However, that does not mean that more than 50% of mining nodes are physically in China, as noted above.
China Transforms Bitcoin Mining from 2012 Onwards
Bitcoin was initially mined using more generalized hardware like a CPU or GPU until 2012 when ASICs or Application Specific Integrated Circuits were used. ASICs, as the name implies, is hardware made specifically to mine bitcoin. ASICs were first developed in China in 2012 by Avalon a subsidiary of Canaan Creative (Canaan), a Beijing based computer hardware company. A year later in China, Bitmain, presently the world’s largest designer of ASICs chips and owner of the largest bitcoin mining pools, arrived on the market. Jihan Wu is the co-founder and CEO of Bitmain and is also one of the most controversial figures in the crypto world today, accused of multiple 51% attack attempts on the bitcoin network. Avalon and Bitmain paved the way for China’s dominance in the bitcoin mining hardware industry and subsequently took the lead in the development and localization of bitcoin mining pools.
Bitmain operates two mining pools; AntPool and BTC.com, and is a major investor in ViaBTC. Together these pools total 46.8% of the hash rate (see Figure 1). F2Pool, BTC.top, Bixin, DPool, 58 Coin and Poolin are also located in China with a few also running operations in other countries. That brings the total amount of bitcoin mining pools located in China is approximately 73%. Some pool and node locations are unknown but many crypto observers attribute them to China.
Emergence of the Debate?
A simple search through twitter, reddit and major bitcoin forums shows that the concern over-centralization of mining in China is not new. The debate was brought up earlier this month at San Francisco Blockchain Week. There, Ben Kaiser, one of the researchers behind the infamous Princeton-Florida report cited above, gave a talk about their findings. PANews caught up with Kaiser to discuss his research. According to Kaiser, China poses a definitive threat to the network for two main reasons:
- China’s control and censorship of internet traffic in the country can prevent blocks from reaching nodes outside of China and slow down the bitcoin network. The latter of which has already occurred between 2015 and 2016 until an upgrade was introduced by bitcoin developers.
- China’s centralized government can influence miners to shut down their operations due to political concerns that would outweigh economic incentives for domestic miners. Such an action has already occurred for cryptocurrency exchanges when they were banned in September of last year. Many of the exchanges simply moved their operations.
If both attacks occurred what would happen to bitcoin? The network would not be completely destroyed but it would significantly slow down. Kaiser believes that one of the main priorities for bitcoin should be to decentralize its mining. He states that such decentralization is already underway this past year. While 74% of mining pools are in China, according to data from Kaiser and his team, the total network hash power physically in China is 25%. Kaiser mentions that such percentages are not one-hundred percent accurate as many node locations are still unknown.
This means that much of the hash power directed at Chinese mining pools is not all located in China. As a result, those mining nodes directing their power at Chinese mining pools can redirect their power at any time.
Based on the data above, viewed collectively, the conclusion to the question of whether China poses an immediate threat to blockchain is a solid “perhaps.” What is certain is that the perceived threat is not as dramatic as recent sensationalist headlines in blockchain media have made it seem (ex. 1, ex. 2, ex. 3). While Kaiser and his team argue that there are political motives that can lead China to “destroy bitcoin” the likelihood of this occurring is low. Furthermore, the paper itself is mediated in its claims.
Incentives embedded in the bitcoin network are argued to outweigh attacks to the network as stated by many supporters of bitcoin and researchers alike.
In the context of the US-China trade war, defined by its technological arms race and overall tit for tat political showmanship, we should not be too quick to jump to conclusions. Blockchain, the underlying technology behind bitcoin, is still an immature technology that many nations have their eye on researching and developing. While today, the blockchain industry is flourishing in China and continues to attract investors, academics and developers to the nation, the question of how China will use this burgeoning industry remains to be seen.
