Researchers from Princeton University and Florida International University seem to suggest that China could pose a threat to the future of Bitcoin, the world’s first and most popular cryptocurrency.
Bitcoin was created to facilitate the peer-to-peer transfer of value in a fast, reliable, and secure manner. The underlying blockchain technology uses a distributed network to enable transactions which are validated by particular nodes called miners. The miners are, in turn, rewarded for sparing their computational resources to confirm the transactions and arrive at a consensus before they are recorded in the blockchain.
The software protocol was designed to be decentralized so that no central authority could exercise control over the network or the cryptocurrency. However, over the last few years, Chinese companies have monetized the technological advancements in chip design by manufacturing and deploying these ASIC (Application Specific Integrated Circuit) chips for mining.
Chinese firms also own the biggest mining farms resulting in the miners controlling a 74% hash rate on the Bitcoin network. According to the paper, “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and ﬁve of those six pools are managed by individuals or organizations located in China.”
Even the largest exchanges in the world are owned and operated by Chinese firms, although most were forced to move out of the country due to the trading ban imposed in 2017.
Although the Chinese government does not directly control the companies running the mining operations, it does hold centralized control over the country’s financial and economic activity, argues the paper.
Control of 51% hash rate on the Bitcoin network can enable the miners to execute a 51% attack, giving them the authority to deny confirmations, which can lead to disruption of the network. The attackers can also reverse transactions and cause a double-spend (managing to spend the same coins twice).
China is also known to maintain extensive surveillance and censorship over the domestic internet to suit its goals. The paper goes on to explain that the tools deployed by the government like the Great Firewall and the Great Cannon are capable of traffic filtering, injection, and tampering leading to cyber-attacks like DDoS (distributed denial of service).
According to the paper, before June 2016, Chinese miners were mining empty blocks (to earn the mining rewards) because the Great Firewall’s latency overhead was slowing down the rate at which their proposed blocks could propagate. Empty blocks, apparently, are not good for the network as they process no transactions but consume network resources affecting the throughput.
Why would China, if at all, do such a thing? “There are four goals that China may wish to achieve by attacking Bitcoin,” the paper reasons, explaining:
Bitcoin stands in ideological opposition to China’s centralized governing philosophy, so they may be motivated to weaken or destroy it to make an ideological statement. Second, the government may attack Bitcoin for the purpose of law enforcement: administering capital controls or preventing other illegal activity. Targeting speciﬁc users for deanonymization and censorship would allow China to crack down on illicit uses of Bitcoin. Third, although China has expressed distrust of Bitcoin, they may still determine that increasing control over the system is beneﬁcial. Finally, as Bitcoin becomes more widely used and more tightly integrated into global ﬁnancial systems, it becomes a possible vector for attacking foreign economies.
Although it is highly unlikely that China would do something so terrible, the theoretical possibility cannot be ruled out.
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