The Bitcoin economy has grown to an estimated $1.5 billion, and this financial juggernaut is now being threatened by a flaw in the way the virtual currency is created, according to a paper published by Sirer and his fellow Cornell University researcher Ittay Eyal.
Bitcoins are created, and kept scarce, by a process called “Bitcoin mining.” They’re generated by “miners” applying their computers to solve a cryptographic puzzle.
When each puzzle is solved—which is a result of raw processing power and time, not of the same kind of brain power one uses to solve, say, the New York Times Crossword Puzzle— it adds a digital block to the public ledger of the total global Bitcoin transactions, known as the "blockchain." Each successful strike pays the miner a small percentage of the new currency.
When each block results in more than one successful instance, it splits. The longer chain becomes the “real” one that subsequent users will mine.
But if a group unites to attack a shorter chain, not releasing successful puzzle solutions to the public—a practice the researchers call “selfish mining,” they can gain an advantage and capture a large amount of Bitcoin, doing damage to other miners and to the system as a whole.
“Lengthening the private chain would make it the dominant one when eventually released,” as Chris Baraniuk of New Scientist wrote. “The group would then get a higher share of coins than is fair for the resources they have contributed because they have forced other miners to waste computing power on the original chain. The problem gets worse as the selfish group recruits extra members.”
“(A)ny group of nodes employing our attack,” the researchers write, “will succeed in earning an income above their fair share.”
In essence what the researchers are saying is this: If enough Bitcoin miners collude and decide to withhold their successes from the community, they could grow large enough to significantly, perhaps terminally, compromise Bitcoin itself.
Sirer and Eyal have created a fix which they have asked the Bitcoin community to assist in deploying. This fix will make it impossible to create such a syndicate with under 25 percent of the ecosystem’s collective computing power.
The problem? There are groups whose power could conceivably cross this threshold.
One of the big fears in the Bitcoin economy is that a determined individual or group could secure a majority of the currency. Nation-state-sponsored fiat currencies like the dollar are too widespread to fall victim to this strategy, but bitcoin is still small enough that it could be vulnerable.
On the other hand, this vulnerability could just benefit the "selfish miners" without bringing down the entire Bitcoin economy.
"Mining is only a piece of the overall Bitcoin structure. I do not believe this will have an impact on the currency, however it might make a few miners very rich," said Adam Draper, of Bitcoin-focused investment firm BoostVC.
"It is pretty clear from Bitcoin's 5 year track record that this isn't a problem in reality," said Roger Ver of BitInstant.