Bitcoin

The bitcoin network appears to have faced down a potentially catastrophic challenge over the last few days: the possible assumption of majority control of global mining power by a single mining pool. Had this happened, it could have destroyed trust in the crypto-currency, rocking the ecosystem, and destroying much of its value. It may sound alarmist, but the code red reaction by bitcoin enthusiasts on message boards across the Web says otherwise.

Ghash.io, which is owned by cloud-mining service CEX.io, was already one of the largest bitcoin mining pools in the world. The pool increased its share of the total computational power in the bitcoin ecosystem as high as 42 percent yesterday, according to blockchain.info. For a while it wasn’t known how much of this computational power was owned by CEX.io and how much is owned by third parties who have simply joined the Ghash.io pool to increase their odds of successfully mining new bitcoin blocks. The company later revealed that the split is currently 45 percent owned-and-operated BitFury ASIC miners and 55 percent independent miners.

Regardless of the path to this point, the fact is nearly one in every two units of computer horsepower dedicated to mining bitcoin anywhere in the world was working in cooperation for a period yesterday – a number that was increasing steadily. Had this figure crossed the 50 percent threshold, a so-called “51 percent attack” in ecosystem speak, the group would have the potential to double-spend bitcoins transactions, reverse transactions, prevent confirmations, or interfere with other miners. Even at its current size, Ghash.io has disproportionate power in the ecosystem and could potentially destabilize the blockchain transaction confirmation system on which bitcion is built.

At least in theory.

There has never been a 51 percent attack, so it’s unknown how effective it would be. There’s also no guarantee that Ghash.io’s intentions were, or would become, evil. But the bitcoin mining community appears none too excited to find out. After extensive pleading by fellow miners it appears that Ghash.io’s computational power share over the last 48 hours has been reduced to 38 percent as of this writing. It’s not clear what lead to the reduction, but it’s likely some combination of mining rig owners severing their allegiance with the pool other rigs coming online elsewhere in the ecosystem.

A central component of the value proposition of cryptographic payment protocols like bitcoin has been their decentralized nature and ability to limit the need for a trusted third party like a bank or a payment processor to complete transactions. Doing so, the theory goes, reduces both cost and potential points of weakness in every transaction. But with a 51 percent mining pool, this would no longer be the case. The bitcoin ecosystem would be forced to trust the actions of this entity.

CEX.io didn’t offer any comfort or reassurance (or any comment at all) as the power of its increased rapidly over the last several days. Only well into the community freak out, did the company issue a press release detailing their plans to prevent reaching 51 percent control. The company wrote:

Although the increase of hash-power in the pool is considered to be a good  thing, reaching 51% of all hashing power is serious threat to the bitcoin community. GHash.IO will take all necessary precautions to prevent reaching 51% of all hashing power, in order to maintain stability of the bitcoin network. We have put a plan in place to see that 51% of all hashing power, will not be maintained by Ghash.IO.

This isn’t the first time that the Ghash.io pool has caught the attention of fellow miners. The pool was affiliated with a double-spend attack last year, prior to its affiliation with CEX. CEX was quick to condemn such behavior upon acquiring control and to distance itself from any involvement, while to rewriting the mining engine to prevent future exploits. It’s also not the first time a group closed in on mining control, as a group known as Deepbit approached the 51 percent threshold in 2011.

As long as there are economic incentives to aggregating more mining power, it’s likely that groups will continue to see how large they can grow. That said, anyone who’s invested hundreds of thousands to millions of dollars in specialized mining hardware, and who holds much of their wealth in bitcoin has a strong incentive not to destabilize the entire crypto-currency network – something that would be extremely likely should anyone ever reach 51 percent control.

As bitcoin continues to grow in reach and adoption, the size and diversity of the mining pool is likely to grow. Ideally, this group will consist of many strong but equally balanced pools both competing for fair rewards and maintaining the stability of the network.

Surviving challenges such as 51 percent attacks, exchange and marketplace closures, fraud, and regulatory changes, can be viewed as a coming of age process for the bitcoin ecosystem. Despite the very real prospect of network instability, bitcoin never plummeted in value. Rather, the Coindesk Bitcoin Price Index is currently at $833, down from a three-day high of $972 on January 7th. In the stock market a 15 percent drop would be a sign of fear and lost confidenc, but in bitcoin, that’s business as usual. The index is still up 3 percent over the last week.

Bitcoin is not out of the woods yet. Ghash.io still owns a disproportionate share of all network mining resources, but the numbers are trending in a positive direction. Equally important, however, were the actions of the community to recognize and act in the face of this potential threat, which may be a sign of its maturity.