The Paradox of Trust in Permissionless BlockChain

A few days ago, I posted on work by my colleagues (Eyal, Sirer, Van Renesse and Gencer), who showed that most BitCoin mining is occurring in a fairly small number of data centers, mostly operating in China.

Why is this even possible?  To appreciate the context, it helps to realize that any BlockChain system that operates anonymously needs a way to protect against DDoS attacks (BlockChain assumes that some percentage of the participating computers are unhelpful and perhaps even malicious in a Byzantine sense, and hence could try to flood the system with nonsense of various kinds).  To this end, they employ two mechanisms: (1) A proof-of-work requirement, so that it takes some heavy computing to generate new blocks; (2) A cryptocurrency reward for solving those puzzles and placing new blocks at the end of the chain.  Basically, even though you don't trust some of the computers, you block bad behavior and incent good behavior. 

This is how new cryptocoins arise.  Unlike fiat currency, which is simply printed by the United States Treasury, or the Chinese Treasury, or the Swiss one, you need to earn your BitCoins or Ether coins, by mining.  While you can also obtain coins in transactions with other participants, for example by selling them chewing gum or some other high-value commodity, those are previously minted ones.

As cryptocurrencies have soared in value, one after another, the potential to become rich by playing a big role in coin mining wasn't lost on the kind of companies in a position to invest in doing that.  In fact it makes sense to jump in early: you mine lots of coins back when the chain had no real value, and later it turns out that you possess a resource valuable beyond all comprehension.

So, if you are the kind of company that builds data centers, data centers specifically for mining cybercurrency makes sense.  It became very appealing to pursue this form of reward by five years ago, and massive data centers emerged.  Gradually, they upped their game, deploying cutting edge hardware to gain a performance edge.  This pushed less-well-equipped miners out: Anyone who knows how to mine faster and cheaper can earn more and more of those precious bits. 

But it turns out that this dynamic favors places like China, which have inexpensive electric power and labor, yet also have the needed high-tech skills to actually create and run such a mining operation.  So (1) the mining quickly concentrates in a few places, and (2) they tend to be in China.  But that one-two story creates a new and unexpected threat.

The risk is that once a majority of BitCoin mining becomes concentrated in the hands of any small number of players, they can use their power to control which transactions are logged and when, or can offer preferred performance to their friends and penalize their enemies, or even force a rollback to really harm someone they dislike.  A rollback is pretty drastic: since the coins actually originate in blocks within the chain, if the block that minted a coin rolls back, that coin evaporates.  Worse, transactions won't automatically be reissued and performed in the new chain: a transaction becomes invalid if it uses even a fractional version of a non-existent coin.  So potentially, some coins evaporate and some transactions evaporate too.  Yet the chewing gum already changed hands, and has been chewed.  Can't roll that back...

The risk is definitely real.  First, the mere possibility of behaving like a cartel in order to extract more profit from the BlockChain is a powerful force in favor of the first players to explore doing so.  Of course, any cartel will quickly turn into a kind of BitCoin mafia, but the members will get very rich in the process.  So it will happen sooner or later, purely due to market forces.

As for making deals to favor some transactions, or trying to extort money in exchange for fair treatment, we are definitely already hearing stories along those lines today.

But the really extreme case hasn't occurred -- yet.  The scenario here starts with a political event, such as a trade war or a confrontation over the ultimate status of some Asian island-state, or even a border dispute.  It causes great tension between China and some other country that uses BitCoin (or some other cybercoin where Chinese data farms are doing much of the heavy lifting).  Then you have to imagine that China is so angry that it steps in, demands national control over the data centers within its own borders, and then sets out to use this control as leverage in their global political ambitions.  This escalates until they just wipe out some huge portion of the chain by aggressively mining to create an even longer portion.  Everyone expects roll-back events with a block or two, but nobody is prepared for roll-backs that might span days, weeks, months... even years.  Could it happen?  Apparently.

So rather than wander into a gloom and doom story again (I did that on a prior posting), I wan to comment on "hoist on one's own petard" aspect of this.  Is BitCoin in fact doomed, in some way, by the very principle of democratization and global fairness that Satoshi set out to achieve?

How did I ever come up with that idea?  Well, you need to think about Satoshi Nakamoto's missive, the document that inspired the entire endeavor.  The story was basically one of eliminating the monopoly power that governments hold over fiat currency in favor of a global and decentralized model: everyone would mine coins, and everyone would share the benefit.

But with this flipped situation where the economic incentives favor centralization, we can now see something that wasn't evident back then: a paradoxical outcome in which it turns out that the seeds of monopoly were actually hidden in the original premise!  We need a game theoretic analysis!  But it seems to me that BitCoin is turning out to be a game with an unexpected Nash Equilibrium: a state in which there is a small monopoly in total control of the BlockChain.

It all centers on a mistaken notion of trust.  In Satoshi's writings, the concept of trust is central.  Satoshi does not trust centralized government, leading him to invent a new ecosystem in which nobody needs to trust any at all.  Everyone runs the BlockChain software, nobody cares where it runs, or trusts the participants, yet the chain grows, and everyone can use it to buy and sell the flavor of bubblegum that they prefer, in perfect anonymity.   In concept, at least, there is no advantage to be had by modifying the protocol or attacking the chain.

But we can see how this neglected one aspect of trust: trust that the BlockChain software is run by large numbers of autonomous players, and that mining doesn't become concentrated in any pool that gets even close to controlling one third or more of the mining power.  The point about one third, by the way, arises from a different way of manipulating the system: in a previous result, the same authors managed to show that a cartel with one-third of the mining power can earn all the income by sharing certain kinds of information only within cartel participants (this is a slight violation of the protocol, but one you could implement with just a few lines of changes to the BitCoin code base).

Nobody would know that the cartel had pulled the trick off.  It would just start to win every single competition to place the next block.  By shifting through lots of aliases, it would be quite hard to prove that they were up to this.

Conclusion: It appears that the economics of cybercoin mining creates an unexpected pressure to concentrate mining power in a small number of players.  This in turn gives those players an incentive to form a cartel, in which case they can earn all the money, decide which transactions to clear and which to ignore.  And if they get really, really angry, they can collapse the entire BlockChain.

Would I worry about this, if I was invested in BitCoin?  Actually, I think the risk seems real and worrying enough to genuinely think about.  It could happen.  And if the chain were to collapse, all of that wealth would evaporate like so much pixie dust.

So why aren't the big players in a panic?  My guess is that they have profited so greatly from playing in the current high-risk ecosystem that BitCoin represents that they became inured to risk along the way.  BitCoin sometimes doubles in price (or loses 80% of its value) in minutes.  Maybe this blog posting will send it on some new gyration.  And these investors have learned that like a really great roller coaster, each stomach-wrenching downslope is followed by a giddy climb to previously unimagined heights.  They get hooked on it... and are unable to appreciate that giving some cartel power to collapse the whole thing is perhaps unwise -- like simply assuming that the rollercoaster framework is sound, while entrusting it to an unknown construction crew from out of town.  Did they loosen the bolts last night,  secretly?  You might not find out until the thing literally collapses underneath you, and by then it would be far too late to reconsider your willingness to take another ride!

So here's a shout-out to my friends who work on game theory.  Are BlockChain systems doomed to form cartel structures?  Or could one imagine a version of BlockChain in which membership is anonymous (permissionless), and yet cartels cannot arise?

One last observation.  Right now, nobody thinks of systems like Microsoft/VMWare/Facebook's Corfu logs as the basis for a BlockChain, primarily because they don't use proof of work, because they don't operate in a permissionless model.  Same for Derecho, the system we've been working on at Cornell: Derecho is a fast version of Paxos, but you wouldn't normally store HyperLedger records into it.

But why not?  Why shouldn't we create permissioned ledgers this way?  We would eliminate that rate limitation, which drives everyone crazy right now, and in fact would gain other advantages too: auditability, elimination of proof-of-work computations.  This would be good, right?  Rather than mint coins in exchange for mining, we could just stick with traditional fiat currency, but allow these ledgered transactions to talk about it: "For the sum of $1, Ken agrees to sell five packs of BubbleYum Chewing Gum to Ittay."    Maybe later we find a follow-on transaction: "The third party escrow agent confirms delivery of the gum", and after that, confirmation that the $1 changed hands.

Then we could focus on ways to run transactions that span multiple BlockChains.  Maurice Herlihy just published a paper on a protocol for doing that sort of transaction.  Even more interesting than the solution is the specification: if I run a private chain at bank branch A, and it interacts with your branch B of some other bank, how do I know that the transaction was safe, and valid?  And can we avoid creating an audit dependency between A's private log, and B's private log?  Would there be a role for an organization like SWIFT, to assist in clearing at the end of the working day?

You can see where this all leads... my colleagues in game theory would oblige me by proving that permissionless BlockChain is doomed to create high-risk monopolies that concentrate all the control in the hands of a few small cartel-like groups.  Bad news.  To save themselves from a total coin-ocalypse, everyone switches to permissioned models, and we work out the details for using those to host cryptocurrency.  My research group and I enhance Derecho until it stands alone as the ultimate solution for solving that problem (perhaps you didn't know this, but Derecho is provably optimal for Paxos, and in fact is demonstrably way faster than any previous Paxos system, too).  My students then go out and commercialize this...   I like this story!

So what about it, game theory people?  Is this BitCoin vulnerability inevitable in permissionless BlockChains?