Centralization Drives Need for Bitcoin Network Changes

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The Bitcoin community has been anxious lately about the centralization of the network’s computing power into large pools of miners. On June 13, the largest of these pools, GHash.IO, briefly represented more than half of Bitcoin network’s computing power. Any party controlling more than half of bitcoin production, or its hash rate, could abuse and destabilize the network. It could exclude other miners from contributing successfully to the block chain (chronological public record of transactions), prevent the confirmation of transactions, or reverse ongoing transactions, enabling double-spending. Otherwise known as 51% attacks, this structural flaw is a design weakness of the cryptocurrency network.

A 51% attack could undermine the value of bitcoin. That degree of concentration would challenge the assumption that bitcoin is a decentralized alternative to traditional third-party payment systems, a key to cryptocurrencies’ appeal. Centralization also reduces the security of the network by creating a single point of failure.

In response to alarmist headlines, CEX.IO, the exchange that lists GHash.IO, has stated that it will prevent an attack. Because of the distributed and public nature of the blockchain, CEX.IO can detect violations in real time. It has pledged that in the future GHash.IO’s share of the network hash rate will not exceed 39.99%. So far, it has delivered on its promise.

Long term, these promises are likely to ring hollow. Self-interested miners need incentives to avoid forming collectives with large shares of the network hash rate. Until this realignment occurs, the security of the Bitcoin network will continue to rely heavily on honest pool operators monitoring and correcting the behavior of miners.

Bitcoin’s underlying open-source software can be changed, and several contributors have suggested ideas to discourage large mining pools. While the Bitcoin community continues to tolerate a temporary fix, the stability of cryptocurrency networks currently relies on trust alone. Its long-term viability demands cryptographic proof.

Originally published on ark-invest.com

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Centralization Drives Need for Bitcoin Network Changes

The Bitcoin community has been anxious lately about the centralization of the network’s computing power into large pools of miners. On June 13, the largest of these pools, GHash.IO, briefly represented more than half of Bitcoin network’s computing power. Any party controlling more than half of bitcoin production, or its hash rate, could abuse and destabilize the network. It could exclude other miners from contributing successfully to the block chain (chronological public record of transactions), prevent the confirmation of transactions, or reverse ongoing transactions, enabling double-spending. Otherwise known as 51% attacks, this structural flaw is a design weakness of the cryptocurrency network.

A 51% attack could undermine the value of bitcoin. That degree of concentration would challenge the assumption that bitcoin is a decentralized alternative to traditional third-party payment systems, a key to cryptocurrencies’ appeal. Centralization also reduces the security of the network by creating a single point of failure.

In response to alarmist headlines, CEX.IO, the exchange that lists GHash.IO, has stated that it will prevent an attack. Because of the distributed and public nature of the blockchain, CEX.IO can detect violations in real time. It has pledged that in the future GHash.IO’s share of the network hash rate will not exceed 39.99%. So far, it has delivered on its promise.

Long term, these promises are likely to ring hollow. Self-interested miners need incentives to avoid forming collectives with large shares of the network hash rate. Until this realignment occurs, the security of the Bitcoin network will continue to rely heavily on honest pool operators monitoring and correcting the behavior of miners.

Bitcoin’s underlying open-source software can be changed, and several contributors have suggested ideas to discourage large mining pools. While the Bitcoin community continues to tolerate a temporary fix, the stability of cryptocurrency networks currently relies on trust alone. Its long-term viability demands cryptographic proof.

Originally published on ark-invest.com

Fred Pye

Frederick T. Pye

CHAIRMAN, CHIEF EXECUTIVE OFFICER & DIRECTOR

Frederick T. Pye is the Chairman, Chief Executive Officer and Director of 3iQ Corp. He is also the Chairman and Director of 3iQ Digital Holdings Inc. Mr. Pye is recognized for creating and promoting creative and unique investment products for the investment industry.

Mr. Pye has managed private client portfolios with Landry Investment Management and various other investment dealers. Prior to this Mr. Pye was Founder, President & Chief Executive Officer of Argentum Management and Research Corporation, a company dedicated to managing and distributing quantitative investment portfolios including the first long-short mutual fund in Canada.

He was also Senior Vice-President and National Sales Manager of Fidelity Investments Canada and an integral part of the team that saw assets rise from $80 million to over $7.5 billion in assets under management during his tenure. He also held various positions with Guardian Trust Company, which listed the first Gold, Silver and Platinum Certificates on the Montreal Exchange.

Mr. Pye obtained a Masters in Business Administration from Concordia University.