EB68 – Kamikaze Attack, Block Halving And The Perils Of Proof-Of-Work

Transcript

hello welcome to epicenter bitcoin the show which talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is sebastian with you and my name is fran favoring crane so today we have a bit of a special episode because uh one of our guests canceled so and and next week there's the inside bitcoins conference coming up i'm going to be giving a talk uh on the inside bitcoins at the inside bitcoin's conference about um topic that i've been thinking about a lot which is uh the economics of proof-of-work and the security of proof-of-work so this episode today we're gonna dive into that and it's your practice run it's a practice run yeah but i think it would be very interesting there's some uh some

i have this scary attack scenario that i've it's been on my mind for a while there's actually quite a few times i've asked guests about that and they often had like brief answers but today we really dive into that so so actually what so this this is a topic that brian is doing a lot of research on i'm sort of following from a distance because you know since he's sort of interested in taking interest but i i mean he had to walk me through the whole attack scenario uh before the show in order for me to at least get an idea of what uh what this entails so i'll so i guess today brian's sort of the guest uh in a sense i'll be asking him some questions and we'll try to uh explain

this this attack scenario that he well him and others have been uh imagining um and uh yeah so it'll be sort of a way for you to practice your talk and also for me to get more understanding about this topic which uh up until now i had very little knowledge about um so speaking of uh speaking of inside bitcoins so inside bitcoins berlin's happening on the so this week that is thursday friday thursday friday the fifth and sixth right and there's a bitcoin meetup on wednesday too actually yeah in berlin yeah so i'm going i'm gonna be in berlin tomorrow uh as of monday or the day this is released uh

really excited about that and so if you want to if you want to go to inside bitcoins uh berlin you can get 15 off by using the code epicenter ibc all in caps uh epicenter ibc and you get 15 off and so i'll be there can't wait to go so excited to leave tomorrow before we get started there's another thing we want to briefly mention um so as uh as many of our listeners know this show started an entry and a contest in the ltb network uh we came in second place in that contest that was over a year ago and at the time we had the opportunity to join the network we went back and

forth with adam about it and sort of debated for a long time whether we wanted to do that or not and at the time we came to the conclusion that it wasn't right for us at that at that moment and we decided to stay independent and to do our own thing uh we stayed in good contact with ltv and think that they produce really good content and all the shows their own network really successful um so recently when we had adam on again we reopened the discussion with him and a lot of people in the comment sections were saying you guys should join ltv and so it kind of gives you the magic word where's the magic word no so long story short so we decided that we would like now now that we've sort of

established our brand and we've established a show and you know we've kind of grown to where we are today that we want to join the ltv network so this show will be the first show on the ltv network since the pilot actually uh so our show will still be available like if you listen to the show now it'll still be available on the feed that you listen to on itunes with soundcloud we'll be on our own um youtube channel as well but we'll now also be on ltb channel distribution the lgbt distribution channel so that means there are ss on itunes and any other podcast at the duelist that you use um on their soundcloud page as well i might no no not the soundcloud page but in

their rss feed and as well in their ios app so we're really excited about that for several reasons one i mean it's just it's an opportunity for us to reach another part of the bitcoin community that we haven't been reaching so far and also to be in touch with the ltv community which i mean is is quite a large community with lots of interesting people and there's a lot of discussion happening there so um yeah so having said that so we'll also be doing the magic word as of now um so at some point during the show pay attention what's that so pay attention yeah uh at some point during the show you'll hear the magic word and then you'll be able to go to let's

talk bitcoin.com to sign in and get your list of rewards so for those of you who don't know uh how this works uh if you don't listen until tb at all you've never heard of the magic word concept the idea is that as a reward for listening to the show you get some ltb coin ltb coin is of course let's talk bitcoin's currency which is built on top of climate party uh once you hear the magic word you have seven days to go to lifestockbitcoin.com sign in and in your account there'll be a place where you can enter the magic word and you'll get part of the listener award it's sort of a way for you to get rewarded for listening to the show which is what makes the success of the show really and also a way for us to know who's

listening and get some analytics and feedback on uh on who's listening so we look forward to uh to this new adventure uh look forward to uh growing some more and growing with ltb and yeah we couldn't be more excited absolutely okay should we get started yeah we should definitely um so you were telling me about this uh attack scenario that that is being talked about and it's it's based on what will happen in 2016 which is the block reward we'll have um well i would put it like this

actually the the tax scenario that i've been thinking about is it's sort of a broader it's a broader question right just a question like what makes bitcoin secure and how is the security going to develop and what's the risk of an attack happening i actually didn't think of it in terms of the 2016 block halfing but i was talking with jonathan levin about it a few days ago and he mentioned that and 2016 indeed will be sort of an ideal time to execute this attack but it doesn't it's not limited to then it could happen sort of any time or later to and if it doesn't happen then it could happen some other time right so this attack can happen it could happen now it could happen in the future just like having gives initial uh additional incentive to do that yeah it

can't really happen now but we'll we'll talk about that so but maybe to to start off uh let's take a step back and think about you know what makes bitcoin secure right and i mean in bitcoin sort of the truth or the state of bitcoin is determined by the longest blockchain right so the the longest chain of blocks and the security in bitcoin is a 100 an economic concept right it comes from the idea that the longest chain is the true chain and as long as a majority of the bitcoin network is honest then you know you can't attack it right so this is so it's

an economic concept of security because if somebody has unlimited unlimited money unlimited hashing power they can obviously get the majority of the hashing power and they can be the true chain and in that case sort of all bets are off like you can do all kinds of evil things so i think the important thing to realize there is that you know bitcoin security um is an economic concept it's a concept of cost the question is like how much does it cost you to get the majority of the hashing power and bitcoin is secure as long as it costs you so much that nobody has an incentive to do that

i think that's sort of the core the core idea of bitcoin security and also where one can sort of think about is bitcoin actually secure because of course the question then come up if if you think of security in that way and number one who has an incentive to attack bitcoin how large is that incentive and number two uh how much does it cost to attack bitcoin because bitcoin is only secure so long that the cost of attacking bitcoin is larger um than what you can get out of attacking bitcoin and when that reverses and you start to be able to get more from attacking than the attack itself

costs you bitcoin is no longer secure bitcoin becomes very very uh vulnerable to attacks and the sort of case a claim i want to make here is that i think this is going to reverse this this relationship in the future and it will be possible to make more money from attacking bitcoin than it costs you like today that's not the case i think today uh it will probably be you probably wouldn't be able to make more money from an attack than it costs you but in the future i think you will be so that's the sort of the main case i think it's a very scary scenario i remember recently we had a broadcast with tim swanson somebody commented like

god this was so depressing for bitcoin uh well do you get another one of those today so um so to just sum up the the security of the bitcoin network is is based on the cost of of attacking it and what you're proposing here is that well what you're theorizing is that that cost those those those costs will flip at some point uh in the future yeah right so there's the cost and there's the and there's how much to make from it right because if it's if it's relatively cheap to attack bitcoin but there's no way to benefit from an attack then well you can also say it's kind of secure relative right yeah of course ideally we would

like to have the cost of attacking bitcoin be really really high and to potential payoff be much lower and then we could say bitcoin's really secure um yeah so uh well let's talk about the attack right so uh there are sort of two parts to the attack number one is you short bitcoin so uh for those who don't know shorting bitcoin essentially means that uh you make a bet with someone uh on the bitcoin price and so for example me and sebastian we make it back on the bitcoin price and if the bitcoin price by let's say june 1st is below 30

sebastian pays me a thousand dollars and if i'm wrong and it's above thirty dollars then i pay simscm uh a hundred dollars something like that um so so first someone the attacker takes a large short position on bitcoin so that if bitcoin collapses dramatically the price they make a lot of money from that and two you spend money on attacking bitcoin destroying the trust in the currency and and collapsing the price that's sort of the the way you would do this so the consequences of that also are

that you are willing to lose money on the attack so it's not if if you sort of look at bitcoin in isolation without the shorting that's happening elsewhere uh the attacker is losing money he's spending money to uh sort of undermine bitcoin and and that's money lost he's not going to get it back um so most often i think when people thought about 51 attack they thought about double spending uh and and of course that i think it makes not really a lot of sense because you know what can you do with double spending stealing because so if there's a double spin attack what happens is people lose a trust in a network and your bitcoins are worth less yeah i mean of course you can if you could still imagine that you'd be making

money if if you know the if the the difference between what you've made and the right price is still higher or if you do it on some exchange and then you get like a hundred thousand extra dose coin or something yeah uh but it's uh yeah it's the potential payoff of a double spend on the bitcoin network is just i don't think it's very large and i don't think it will be very large you know that that's what a lot of most people think about when when you talk about a 51 attack what gets talked about the most is this double spend exactly so people can buy shoes and then get their bitcoins back to buy shoes again right

but i mean but what you're saying is uh that's very unlikely the the the attack scenario is much more dire than a simple double spin attack which yeah i think the real danger comes when an attacker does not care about the like does not it's not trying to double spend any money or anything like that it's just trying to undermine bitcoin um and and you know that's that's really where it becomes dangerous so um so how would you do that so first of all we need to talk about the short position if you wanted to do that as an attacker you would need to have a short position that pays you out in in dollars or in some fiat currency right because if

you're kind of destroying bitcoin you don't want to like then make a lot of bitcoins in the process that doesn't make any sense yeah it would make no sense if you were shorting for bitcoin and then the price goes like drops what are you going to do with that yeah exactly so so you need to have uh so you need to make your money in in dollars for example but that's like right now so i don't think right now this wouldn't be possible but in the future um let's say on wall street there are some investment banks that start order derivatives that are based on bitcoin um then i could make a contract with some hedge funds some banks etc that pay me a certain amount of dollars if the

bitcoin price goes below a certain amount and then i don't need to own any big ones to have that position and the other party doesn't need to own any big ones to have that position it's really uh it's a counterparty risk then like you know basically i'm trust the other party that they have the ability to pay if to make good on their promise and and it's the same thing on my side so also it means the attackers should probably as some sort of financial institution hedge fund in particular um and another way could be for example if there's an etf right often there's abilities to short the etfs so if the winklevoss twins

get their etf through one could maybe show that let's say there are some bitcoin companies that go public coinbase maybe they have an ipo you could show their stock and and an attacker ideally would would short all kinds of things right like you wouldn't have like one party to have a big short position against but you would have 50 different parties so maybe you would do all at the same time you should bitcoin stock you would do that you do that you do that um uh try to get some derivatives to short it and and that way you could accumulate a large short position that let's say if bitcoin price total collapses you make 500 million or something like that or

maybe less maybe 100 million is enough to incentivize an attack um and and it's what's important to realize also is that when we talk about a wall street derivatives market it's very it's not transparent so i mean i'm not an expert on that but i think it might be possible to accumulate a significant throw position without people knowing about this like it may not drive to be comprised down directly at least there will be some delay for that happening and you could you could try to execute part of the attack in a covert way um and then of course yeah the

consequences like you can't do this attack today like because you you can't do a big enough short position today but i think you will be in the future right so especially if bitcoin is successful i mean i i think that that's the interesting thing about this scenario and the sort of interesting thing about the larger point here is that i think bitcoin may become less secure as it becomes more successful because you start having much larger incentives to uh to attack bitcoin so that's sort of the the very broad uh the very broad picture thing and now we

will talk about this kind of like really in depth and on how to execute this this is uh this is scariest you sebastian does it make sense roughly well one thing that one thing that i noticed in here is that so when we think about this attack scenario um when we take a when we think about attack scenarios myself uh in any case i see a like a point in time where in fact it could take place over a very long time so if there's a bitcoin atf or if a coin desk goes public people people can start shorting now so someone who's playing planning an attack for saying five or ten years maybe not that long but sometime in the

future they can start setting that up now by placing short positions against bitcoin you know so so it doesn't look at that at the point like when they're doing the attack it doesn't yeah yeah i mean uh well yes and no i mean i think uh to hold the short position you generally you have to pay some money on that like at least you reserve capital and that so it's not free right um so i i don't think it would make sense like to go that far ahead but you could have a few months right like maybe over a few months you would accumulate a short position and that's that's definitely true right so you would you would you would do that gradually that's correct

um so then how how would such an attack be executed so basically the attacker would would try to control the majority of the network and then what attack you can do and there may be several ways of of basically disrupting trust in bitcoin at that stage but one sort of very simple way would just be to mine empty blocks so whenever another miner mines a block you go back to your own chain and you keep mining empty blocks and the consequence of that of course would be that nobody can spend your bitcoins anymore right so if i'm if i try to send sebastian some bitcoins

during that attack like my wallet could send out the bitcoin into network but because the majority of miners are only mining empty block and they disregard any block including transactions no transaction will ever get into a block of course how long would it take for people on reddit to go crazy it's like you know this this is an attack that would be executed in the open uh you know you would tell people about it you would show it to people and the very point would be the panic that ensues um so

so they're they're basically so at this stage um that that's a sort of you know the broad the broad picture uh the broad picture situation now you're shorting so you're shorting bitcoin on one side you on in the fiat world i guess okay with dollars or whatever and you're uh leveraging a large con you're controlling a large portion of the network to mine empty blocks uh so the transactions don't um don't go through and a consequence of this and the like you said the panic and the mayhem is that people try to sell their

bitcoins on exchanges right because and the price goes down yeah because the point is uh you would still be able to trade bitcoin on changes because they're of course off chain right so like somebody on uh coinbase exchange or on bitfinex or on on all these other exchanges at least the conventional exchanges would still be able to trade uh their bitcoins so you could totally have people selling the coins um you just couldn't get out right so it's in it it's a little bit similar it could be a bit of a similar scenario as it happens with mount gawks you know where there was that other thing

a bitcoin builder it was called where you could trade mount gox coins even though you couldn't access them you could move them so this would be a little bit similar so you know maybe i could still trade the coins on some exchange without being able to withdraw them and you know the hope i guess of those people trading the coins would be that you know once you're able to withdraw them again they would recover in value or something but of course that's uh it will be very scary also means that only the people would be able to trade the coins that already have them on an exchange right everybody who holds them on in wallets elsewhere uh wouldn't be able to do that now where does the uh how does the block

having uh the black reward having uh fit into this scenario um that's sort of the amplifier that that really makes it that much more interesting that's true but well actually let's talk first about the the mining pool okay so because one of you had you had this idea about uh what you call a kamikaze mining pool right so um just let me see if i can i can uh show them so the mining pool basically the so the issue here is as an attacker like buying 51 percent of the mining power you know it's actually it may be complicated you may not have access to that right so

one way of dealing with this situation is that you try to bribe people to join your attack and and so you create your own mining pool um that that pays people to mine uh with you and mine all these empty blocks so let's say i as an attacker only have 30 percent of the hashing power i can pay uh other people to join me and attack bitcoin that way and the point is that i can pay way more than other mining fools because i'm making money on the short so i could say

i pay each miner who minds with me 10 times as much as if you mine with another pool so from sort of a game theoretic perspective right we've pulled up the the situation like it looks like this as a miner i i now have the choice like do i mind with the kamikaze pool who's that's attacking bitcoin or do i not mine with that if i'm not mine with that i just have my usual you know one my usual reward and then you know if the attack succeeds then i am pretty i'm pretty right so first of all my mining orders become worthless second of all i i only have my

minimal uh block reward actually not even right because uh if i mine a um it gets undone by the mining pool so i actually make zero this is slightly wrong and if the hat fails well then okay i still have my mining hardware it's still worth something and i had the minimal reward during that time um but if the attack succeeds and i mine with the pool okay the mining or hardware i own has become worthless but i have made you know 10 times as much money and another scenario would be that the tax fails but i mind

during the time of the attack with that mining pool and the attractive thing there is that on the one hand my mining hardware still has some value because now the attack is gone the attacker's gone failed and i can still make money from mining bitcoins and i also got paid for participating in the attack because of course i can i can join or get out of the attack at any time um so that's and of course what we do see here is that in either case whether or not i believe as a miner let's say i'm a miner and i have one percent of the hashing power i'm always better off

joining this attack whether or not it succeeds or not now so the um the the the person of the party uh coordinating the attack would need to pay those miners so we brought this up before we were talking about it so how would they pay them the options they have i guess is to pay them with bitcoin they also can pay them with fiat through bank transfer they could pay them through paypal presumably but if they try to pay them through bitcoin uh the whole point of this attack is to get the bitcoin price down well yeah for for the miner who's uh taking part in this kamikaze pool there's no incentive there so they would have to

pay them in some other someone by some other means yeah i don't know this is a great point um you mentioned perhaps paying them with an altcoin uh but one could imagine that if you undermine the whole security of bitcoin as a system you can also that would probably undermine and absolutely cause the price of all coins to also go down right so uh no it's a great point and that's i think not the trivial problem is like how would how would the attackers pay people to join because you're correct like if you pay people with bitcoin you know what's the point i mean you could in theory imagine that they pay with bitcoin uh because the mine the attacker could still put in transactions in the block so you could still pay them with bitcoin

you could even imagine that you pay them into their exchange address if they have an exchange a pay-in address but then maybe the exchange would block those so i'm not so great right so you you'd want to pay them outside of the bitcoin network that's true and presumably since this is all unregulated so what you're pointing what you were saying pointing out earlier is that this is actually legal currently i mean i mean it wouldn't be illegal to do this so using traditional financial payment systems like fiat or like bank transfers or western union or or paypal or something that would feasibly be conceivably feasible well i was thinking about this before like after you mention it because you you're

certainly right it is it is something that would need to be done somehow one way perhaps to do it so if you mine on this kamikaze blog of course you will have some sort of cryptographic proof that you've done so right you could like it should be possible to prove cryptographically that you've provided certain hashing power for a certain time there um so one thing you could do as an attacker let's say uh maybe some of you are aware of a thing called codeus uh so it's basically some sort of oracle thing so you have a a bunch of servers that verify if something is true uh and then you know it

executes something we can think of is or similar to an ethereum contract let's let's think as an attacker i would put up an ethereum contract where automatically if anyone puts in submits the proof that they've mined on my attacking pool they get paid now i don't know if ethereum is going to be working etc but if not codeus is a ripple project so maybe you could use ripple for that there should be some way to do it at the extreme case because this is legal i think you could for example have a law firm make some sort of public statement that anybody

who submits proof that they've worked on the pool uh get paid and there could be some sort of proof of that the money is there uh it seems kind of unlikely though huh it seems kind of unlikely though why not i don't i mean that what what law firm's gonna participate in stuff oh i mean i think in germany one common thing is like these law firms who send letters to everyone threatening them that they need to pay money because of like supposedly uh illegally downloading for i mean there's all kind of you will not have any problem finding a law firm for this okay

but but the disadvantage of this would be that uh like ideally you have a total trust list yeah the advantage would be if you pay uh people joining your pool in bitcoin is that they immediately get the payment they see you're not lying they see you really are paying for that whereas if i had some law firm make that declaration you make that you need to have some trust that the law firm then will really pay so ideally you have this trustless so that anybody who joins in the pool knows that they're actually going to get paid for joining in that so having some sort of cryptographic thing would be better so i think code use might be one way so you have basically people

submit the proof that they've uh joined the attack and then they get paid some money on the ripple network or or in some other some any other crypto um currency network would probably suffice and ideally you know if it's let's say ripple network they could get paid in and us dollars right or something like that okay well there's lots of uh components to this and there's definitely more to come uh so we'll talk about the black reward having a part of it and just admit before we do that we'd like to talk about shape shift shape shift as you know as the fast and easy way to convert uh

your litecoin your altcoins into bitcoin or vice versa so they support uh well they're adding new coins all the time i'm looking at their website now they have unoptamium now as a coin i'm not sure neptunium oh titanium is now going on sounds very hard to get absolutely yeah yeah so it was unobtainable until shape-shift showed up exactly so now you can trade uh your bitcoins for an obtainium who'd have thought you could never obtain an opinion now they're going to have to rename it to obtainium yeah so shapeshift is the currency the google translate of currency conversion tools so you just go to the website you choose the currency you want to convert and the currency you want to convert to you put the payment address and you just send the payment and in a few seconds

you get whatever currency on your wallet and so last week we talked about one of their tools which is a shape shift lens uh today i want to talk about um another tool that they've developed called the shifty button so let me just share my screen here i love the name by the way uh shifty button here it is all right so if i'm looking here on the so i go to shapeshift.io i click on tools and i've got the generator here for the shifty button so basically what this allows you to do is to integrate shift shift right into your website and i'm going to show you how it works because we've i've added on our donations page so here if you've ever been to our

donations page we used to have our litecoin and uh dogecoin address but we don't even need that now uh just because i can use this uh this uh shape shift button so what i've done is i've went on their site i've copied in my destination address uh didn't specify an amount i generated the code and oh let's just try it in here i'm gonna grab my uh bitcoin address put it here generate code and so it gives you this this blob of html code uh javascript you paste it into your website in our case

we're using wordpress and we get this pay with altcoins button which is really great you just click on it you get the shape shift window that comes up and it allows you to send whatever you to send a donation to the bitcoin address in whatever coin you want so in this case you can say you want to unobtainium by obtaining them you want to tip with entertainment you can do that you can you can give an email address i believe you have to plug in their api to get that information but if you could just tip like this you hit submit that will generate the qr code which you will send your entertainment to and in just a few minutes that will get converted back to bitcoin and sent on our address so this is a great

way for you to uh diversify the types of coins you accept for payment for example on an e-commerce website or just in our case as we're doing for tips so head over to shapeshift.io give it a try and we'd like to share thanks shapeshift for the support of episode bitcoin and and if you want to if you want to donate some of that unobtainium that you've worked very hard to obtain uh you can do that on our website now finally yeah put that entertainment to good use so let's talk about the uh well the the last component to this attack scenario which is uh what i guess kind of tips the

tips of scales um it makes makes this all possible makes us all well profitable at least uh yeah possible from economic sense well i i i you know the thing is i think this can be uh profitable from an economic sense in any case i i think in any case this is a very big danger but then i was i was running uh with jonathan levine through this as some of you may know jonathan uh jonathan levin he's been on the podcast before uh i think maybe twice or something yeah and uh he was the ceo of coinometrics until recently um and so he's very you know very smart guy and really understands a lot of the

sort of economic issues from bitcoin so when i was talking to him about it he mentioned oh you know but you know the block reward happening would be the perfect time to to do an attack like this and i hadn't even follow it in that context but then uh yes so that's he's very much right that this would be the perfect time uh to uh execute an attack like this um so and it would be you know would be dangerous time for bitcoin i think when uh the blocker world having happens so as as all of you will know the bitcoin block report halves every four years right it started

off with 50 bitcoins originally then after four years so that was in 2012 i think um so it must have been the end of 2012 or something uh it dropped from 50 to 25 and you know currently for every block of miner gets 25 and then in 2016 it's going to half again to to 12 and a half and you know so it's going to keep going like that basically until it's at zero and um so what are the consequences of that of course the consequences of that is that for a minor it dramatically in decreases revenues from like one day to the next because like you know

let's say it's 2016 the block reward halfings happens now so today i'm making um 25 bitcoins per block tomorrow the same block being mined i only make half as much um and this will immediately render a large portion of the mining market unprofitable so i think today estimates are that miners spend about eighty percent of their revenues on electricity so if this happened today a block we would having right so we would have of for every hundred dollars a miners earned he was spending 80 on electricity and 20 dollars was spent to

like amortize the hardware and and for profit so if you had the block we were having today that hundred dollars would go down to fifty dollars and each miner would lose thirty dollars you know for every hundred dollars they have revenue uh every fifty dollars have revenue now you know they would lose thirty dollars um of course what are the consequences of that it's not very hard to imagine people would turn off their hardware right so a lot of people would turn off their hardware which would have had two consequences and the first one is that the difficulty or the hash rate would dramatically uh collapse right so you may have from

one day to the next maybe 30 percent of the hash rate could go away or maybe even more and the other thing is that now you have all this mining hardware that has essentially become worthless right because as a miner let's say i was i was making a little bit of money with my mining order now the block rewards collapsed i'm making zero like this is standing around here you know it's basically worthless so you're gonna put it on ebay yeah put it on sale put it on ebay or i could mine with it if some attacker comes in and says i pay you anyway i pay

you 10 times as much you know like so all of a sudden you may have the choice between just being totally worthless and someone still paying you for it right paying you to join the attack so so that's so those are the two the two components that are going to make this very dangerous time is that one is the hash way it's going to collapse and two is that a lot of cheap mining hardware and my own cheap hashing power will be up for sale and and it's and of course it's not like everybody's gonna stop mining right because some people have different cost structures right like some people will get free electricity if you if you're like the son of some governor in china and

like you can get like the government to pay for your electricity you will keep mining because like your marginal costs are maybe zero um or a very close to zero so but but for others it would be different right like anyone in anyone with a higher electricity cost will probably have to stop mining today's magic word is security s-e-c-u-r-i head over to let'stalkbitcoin.com to sign in enter the magic word and claim you're part of the listener award this incentive to stop mining uh when the when the block reward halves does the bitcoin price have any

uh influence in that at all like does is it different if the bitcoin price is at a thousand dollars or ten thousand dollars or is it completely independent well it's kind of independent right like i mean what matters is what really matters is what percentage of uh your revenues you spend on on cost like you know how much margin you have because let's say um for a thousand dollars revenues you make with your miners like your costs are only a hundred dollars now if those thousands go down to 500 well that's bad but you're still going to keep mining right like it's not like i mean you may be less happy about it

but it's not going to change so much but it's very different if your costs are very a large percentage of your revenues and we should also mention of course uh what matters here is what how much money are managed making from transaction fees that's because today it's basically nothing like today it's a very very small percentage i don't remember how much it was but it's definitely much less than five percent i think maybe two percent or even less um so if this happened today miners would basically lose almost 50 percent of their revenues now in 2016 maybe it's going to be different right maybe

miners make uh maybe miners make 30 of their revenues or let's say miners made 40 percent of their revenues um from uh from transaction fees then this wouldn't be quite so terrible right so let's say for a hundred dollars uh before the block we were having 2016 they make sixty dollars from the block reward and forty dollars from transaction fees now the sixty dollars get half right so even miners would lose thirty percent of the revenues so it may be something like that i don't know as so it will probably won't be quite 50 at least if transaction fee revenues

increases but it will be very very substantial uh i don't think there's you know i don't think uh transaction fees are going to be like 10 times the size the block reward there's absolutely no sign for something like that happening okay so if we just bring that all around so you've got uh all the components so one is the uh the shorting so you short uh bitcoin you short that the bitcoin price can go down second component is uh controlling a large part of the network and that becomes possible when a lot of the miners are turning off their hardware so the hash rate goes way way down it becomes a lot more easy for

anybody to get 51 or more and on top of that you've got all these miners with with hardware that's certain no purpose that they can rent or sell to a potential attacker and those are the three pillars that make this whole attack vector possible exactly and and i think the interesting thing about uh the value of the mining hardware dropping and the block we were dropping the point is that even even if you still can profitably mine after the block reward having your hardware has still lost a lot of its value right so even if even if i would still keep on mining

i would still be willing to sell it for much much cheaper because i'm making a lot less money now to be honest there is sort of one one thing a friend of mine has mentioned is that to some extent miners will anticipate this right to some extent minus will know the block award is going to go down so i'm going to invest less in hardware so we may see some decline in investment we will see some secretary and investment uh you know in the six months or something like that before the block reward halves so that that will you know mitigate this a little bit so it may not be quite as fat you know maybe then the drop in the hash rate will be

30 instead of 40 percent or or something like that but there's going to be a significant drop i don't think there's any way sort of around that so one one thing that comes to mind when talking about the the block reward having is that well this happened before we had a block reward half in 2012 as you mentioned why didn't it happen then what are the differences how how is the bitcoin network and ecosystem different now than then and why wouldn't we have seen that scenario in a couple years a couple years ago yeah i know it's a great question i mean actually i should give also some credit here uh to a guy named uh alex mizrah something like that

because there was a there's a interesting uh threat on the bitcoin dev mailing list uh on this on the block about halfing and and that was one of the answers of gavin andreessen is like oh didn't we see that in 2012 nothing happened and i i don't think the situation is comparable at all for a few reasons so number one is there were no asics in 2012 right so it was a very different mining environment you know people were mining on i think gpus probably i'm not even sure but like uh so it was a different environment mining was also less profit oriented right i mean this was still a time when people were like mining at home and all

that stuff uh mining with their own like self-constructed hardware and and a lot of bitcoin enthusiasts reminding i this has already been changing dramatically right and today mining is sort of a for-profit business i don't think there are a lot of sort of bitcoin enthusiasts left to mine just for the fun of it it just doesn't make sense financially um also i think the profit margins are different you know back then uh i guess it's hard to know i'm not sure how it was back then with the graphic cards and all but you know today what we are seeing is that the costs of mining are becoming higher versus revenue so it's getting very tight right

it's a very competitive market and i think that's going to increase even more until 2016. so so people will have at a tight margin high profit margin that makes this more vulnerable and and then the last point which is very important is that in 2012 the there was no way to short bitcoin you couldn't take a short a large short position on bitcoin um and i guess that's one more thing i don't think there was a way to rent mining hardware remotely right because what is going to happen is is you're going to have data centers that have mining hardware in it and anybody can sort of rent the mining hardware the

hashing power and and direct it to the pool they won't do it whatever they want without actually being there and and you know getting the hardware shipped and all of that stuff right so you won't have to do that in 2012 that wasn't a way to do that so i think on on many many levels this is it would be a very different situation from 2012 and just because nothing happened in 2012 i don't think that in any way uh proofs or indicates that nothing will happen in 2016.

so i'm reading through this uh i read through it um it's very interesting and so there's a lot of this is very polarizing it's one of those issues that is very idealistically charged uh in in a sense uh like many issues i guess in bitcoin and so we'll put the link to this uh thread in the show notes i recommend anybody who wants to learn more about this read it so jeff garzig responds with the argument that hash the hash rate market is becoming uh is maturing into the direction of financial instruments where the owner of the hash power is not necessarily one receiving the income they're becoming tradable instruments so there's a complexity of so mining is not just

this sort of simple like one person mine one person gets the revenue uh model it's becoming something much more complex than that as we add more layers uh to hedge risk um what what what do you think how do you think that plays in this system i think that answer doesn't make a lot of sense to be honest i mean if anything if my name becomes more tradable and all that it increases the scenario for this right so that makes it much more likely because then you're able to like acquire all this hashing power without actually having to physically own it and physically moving everything so i i don't i don't think this is uh deals with the issue at all i mean

of course there are some there are some things to be said i think um something adam back brought up in the podcast we did on side chains was that you know in the future uh let's say we have big banks getting into a bitcoin then they could operate or they could buy some hashing power and say you know we operate that just to keep bitcoin secure so they're not trying to make money with that but maybe they're trying not to lose money but not so important for a big bank because it's an operating expense yeah it's just like is sort of like a donation i guess to the bitcoin network that you say like oh we put in some money to keep bitcoin secure and we're okay with losing money

in that or not making money and of course that is very much true right so if we have miners who aren't profit oriented so the same may be true for some people who just love bitcoin right they may say i'm not joining this attack because uh you know because i care about bitcoin and i just don't do that for moral reasons or for reasons of altruism and and that can offer some protection right so i think that that would be one way to protect it and i guess in 2012 also that was much more the case but yeah i don't know so the the kamikaze scenario the only thing protecting us from the common causes scenario is people loving the bitcoin ecosystem not

wanting it to fail if they have any economical uh incentives then they would definitely go for for that well and and there's i guess another thing uh i think i don't know we talked about it briefly before is uh to some extent centralization is a protection against this right because let's say in the extreme case that's a bold statement please explain well i mean i'm not saying it's positive for bitcoin right of course like of course we don't want bitcoin to be decentralized but in this case centralization would actually offer some protection because let's say a big fury owns the majority of hashing power like they completely control bitcoin mining

and now i'm gonna try to attack bitcoin that way well of course it's not possible to do it unless bit fury joins the attack but would bit fury join the attack no of course not right because the whole business is like the bitcoin thing and like they're not going to destroy their own business so and you know i mean that's the extreme case if there's one party but let's say three different companies control the bitcoin network um and they all sort of cooperate with each other know each other then as well if these three companies talk of students says like yeah no we're not gonna do that you know so that can also be protection right so if

if there's a small circle of uh companies controlling bitcoin mining uh you know the chance of this succeeding is definitely lower well which is the case now i would say you know now yeah i i don't know how it would be now it it might yeah you might be right i'm not sure i think it may be it may be somewhere in the middle right and and i think actually then you get you get sort of tricky right because there's at the extreme end if it's very centralized uh it would probably protect from an attack like this if it's very decentralized let's say if if bitcoin users themselves own the hardware it may also protect from it but if it's somewhere in the

middle you know if there's a lot of like a sort of if there's some sort of oligopoly of 20 companies who all sort of distrust each other and like then again maybe it's more possible right because you can directly bribe people there's a few people to talk to beforehand maybe uh so yeah and of course at the point is more we don't want bitcoin security depend on centralization right like that's that wasn't the point right that the whole point was decentralization so if bitcoin security relies on it being more centralized you know that's that's not what we

wanted i mean then then it's like ripple right where ripple controls uh you know all the nodes that that that of course is also secure against an attack like somebody can't just go take over the ripple network because ripple controls ripple network but then that's one of the criticisms always for ripple is that well it's it's centralized so you you have another topic here in the rundown i don't know how this ties into the security versus security state at or at stake ratio can you explain um yeah i don't know if that's always a well phrased uh term but i i guess one one way also to think

about the the security of bitcoin right is that that you sort of have this ratio of what does it cost to attack what does it cost to take over the majority of the hashing power versus how much could one potentially gain right so so how much is like secured by the blockchain so the sort of of course most obvious thing is bitcoin itself right so the value of the market cap of bitcoin so we would want for bitcoin to be secure we would want the cost of attacking the as as large a proportion as possible of the market cap of bitcoin i mean ideally you know if it cost you

three billion dollars to attack attack bitcoin and bitcoin itself is only worth three billion dollars you know that that would be pretty high degree of security um but especially with some the way some people see bitcoin evolving we would have bitcoin not only secure the currency itself but secure all kinds of other things right and and to some extent we have that already right like a counterparty master coin assets those things are all secured by the bitcoin blockchain as well so those things could also increase the incentive to attack bitcoin and um there was there was a nice

episode recently of beyond bitcoins uh with mae haroy i think we're going to have them on here as well sometime with the internet of money and he mentioned something um he talked about this as well right so there's the idea for example let's say people start having a stock exchange that like trade is traded with the bitcoin blockchain or something like that um and then apple stock is secured by the bitcoin blockchain well but apple's worth 600 billion dollars right like how much of an incentive does that create to attack bitcoin if like you know you can attack apple stock somehow or like i don't know the double spend apple stock or like you know you could add those things on top

so so one of the issues with um i guess some of the the ideas that the side chains guys have of like the bitcoin blockchain securing a really wide range of things is that that also increases the incentive to attack bitcoin right so so how how can you keep bitcoin secure um if you go in that direction it's not clear to me really so this is uh it's all very comforting news brian is there any other scenario than this like doomsday scenario or bitcoin just

disappears because it's not secure um i mean what are what are some other scenarios that we can ex that we could postulate uh when this block having uh block reward having happens well i mean one thing i was thinking about and and maybe some people who know this better uh can correct me here but to me it just seems like this is a little bit of a design mistake like why why every four years like why isn't it not continually decreasing why is it not every week why doesn't the block reward decrease every week by i don't know half a percent or whatever it works out to uh

i i'm not sure maybe there's some thinking behind everything would that change anything that wouldn't change the fact that you're at some point your the cost of running mining hardware is going to be below what it costs you to well no but you're receiving it in terms of uh it would change things because you don't have this like from one day to the next like dramatically did this huge transition where from one day to the next mining hardware loses a lot of value and comes the hash rate drops all of that you wouldn't have that right it would be much more gradual so this this like sort of perfect storm of now it becomes really cheap to attack bitcoin and the

difficulty uh you know the hash rate collapses like that's something that you wouldn't have then so i mean one thing that i was thinking about is like well maybe one could change that it also doesn't seem like that controversial a change right because it's it can still keep the 21 million you can still have that sort of decrease like for miners it should actually i don't see why it would be a big disadvantage for miners uh i i don't think it would be this much at all actually and it would somewhat increase bitcoin security now it wouldn't be like a complete solution right i mean i i did think of this attack scenario actually before i thought of the

the block halving situation but but it would definitely i would definitely listen to the chance of this happening has anybody else did you know suggested something like that i think someone mentioned in that bitcoin dev uh thread someone mentioned that idea but you see i think that's one of the problem with things like that like we can talk about this now sort of theoretically and i'm sure some people will will give us reasons why this is not likely right i'm sure some people will say but no it will be different and like people will some people will disagree with me some people say i was wrong here and maybe i am you know like we don't know um so and i think the danger always with

things like that is that we don't do anything until something happens right because like it's just an abstract scenario right now and then if something happens it is you know it's too late so that's that's one thing i've been thinking about is that you know maybe one should have a more proactive way of thinking some of the some of these issues and maybe one should not view them as so like set in stone right like bitcoin was defined like that with satoshi and it's going to stay like that like like those fundamental design parents maybe would say like oh we re-examine that and maybe make some

changes well one thing's for sure is that now that you've sort of laid out this attack vector this is that scenario um i mean now somebody could just conceivably try to do that well i i mean so talking about it i i don't think i don't think this was like this is like a creative enough idea that somebody wouldn't like people wouldn't think of it anyway like i like most of these things are not original right the block i don't know if this mining pool it's not it's not uh unusual idea so yeah i don't think um i don't take the credit of having come up with something very original here you're gonna take responsibility for

bitcoin failing ryan yeah because it was like a bitcoin yeah yeah no so i don't think it would be that you know this is this will be obvious but you know in the end you know there's a george soros you know made made like a billion pounds or something in the 70s by shouldering the british pound you know he kind of broke the pound um once we start having this being really traded as a financial instrument i mean hedge funds constantly try to like short markets and break them and like rig them and et cetera et cetera you know like and this is this would just be another thing like

that you know i mean i i think we are sort of protected at the moment because bitcoin is like isolated from the rest right it's isolated from the financial system but it won't be forever at least not if bitcoin actually lives up to its promise and and becomes more successful yeah i think so sorry i i think that at least having this discussion is is very valuable i mean a lot of people like when you read these mailing lists or when you read reddit and people bring up topics like this it just gets so polarized it's like you know the people that sort of are ideologically charged uh their their uh this course is ideologically charged and and others where uh you know destroy

having more realist um view of things and and there's often a class there saying we shouldn't even talk about this because it's it's pointless but no it's not pointless these are real problems that we need to and yeah and you're right and the other thing i guess is there are so many things to work on with bitcoin right there's like so so many uh so many construction sites going on so many things that need to be improved and so the question is like do you now prioritize trying to prevent some potential disaster scenario a few years down the line versus like working on these immediate problems right here and and

that's a very difficult trade-off to make and and i think people always favor the thing that's right here in front of them and we tend to i think we as human beings tend to sort of ignore and put off the thing the threatening thing that maybe is further down the line isn't immediately visible or urgent right now so i think that is that is a challenge here yeah absolutely well uh it's a very interesting uh topic and uh i look forward to seeing your talk in berlin yeah yeah absolutely and yeah if you if you come to the conference listen to the show and get in touch we'd love to meet up yeah and so there'll be a meet up on wednesday night right there's meetup on

wednesday night yes you're gonna give a talk i'm gonna give a talk on uh bitcoin in france it's gonna be very short no i'm kidding uh no i'll be here you could talk on what's what's happened in the past year uh in terms of bitcoin uh startups uh you know what's happening in france um there's earth something's happening uh i've i've i've found some things to talk about good yes uh so it's you then flavia shalom who we've also had on coinprism he's gonna give a talk he's also french also french yes yeah actually yeah uh yeah so yeah get in touch also if you wanna meet up by the conference you know you can't make your meet up or something for coffee like totally yeah definitely i can't wait to leave tomorrow i'm like

so i'm so excited to be going to go into berlin for a week uh you know just kind of changing um changing uh environments and uh being at the bitcoin center and meeting everybody there it's gonna be i think it's gonna be a a very interesting weekend very i think it's gonna be very inspiring i hope so yes i hope we'll come out with lots of good ideas and how to how to improve the show and what kind of things we can do in the future absolutely yeah yeah well so um i look forward to that look forward to also being back next week with another episode and uh thanks so much for listening to the show i you know there was one thing in my talk i have just like disclaimers like oh i'm going to

talk about something but by the way i need to make some statements here first like i still believe in cryptocurrencies this is still going to be great like so i'd like to say those things too i haven't even bought i haven't even sold any bitcoins yeah so thanks so much for listening you know we'll back next week if you want to follow us on twitter we're at episode btc um you can also give us a tip in unobtainium litecoin darkcoin or whatever other currency using the shifty thing at epson bitcoin.com tips and you know you can subscribe to your newsletter episode the the slash newsletter see you then