Is mining a waste of resources?
Every member who joins the Bitcoin network generates their own address and private key. They can be likened to an email address and its password: people can send Bitcoin to your public address, and you need to use the private key to send Bitcoin out from your balance. Bitcoin addresses can also be presented in the form of QR codes.
When a transaction occurs, the sender broadcasts the transaction to other members (nodes) of the network, who will verify whether the sender has sufficient balance and whether the Bitcoin involved in the transaction has been double-spent in other transactions. Once the transaction is confirmed by the majority of nodes, it will be added to the shared ledger that all users in the network maintain, and all users will synchronize to update the "account" balances of both parties involved in the transaction. For network nodes, verifying the validity of these transactions is very simple. Therefore, using a one-person-one-vote method to validate transactions is not secure; hackers can deploy a large number of fake nodes to validate fraudulent transactions. The double-spending problem can only be resolved without relying on third parties based on the computational power consumed by network members; in other words, Bitcoin can only solve the double-spending problem through a proof-of-work (PoW) mechanism.
Essentially, proof-of-work is a competition among network members to solve mathematically difficult problems that are easy to verify. Bitcoin transactions verified within about 10 minutes will be packaged into a block by nodes, and a certain node will add the block to the Bitcoin ledger, which is the Bitcoin blockchain. Nodes compete for the right to add blocks by racing to find valid solutions to the proof-of-work; once a node finds a valid solution, it will immediately broadcast this solution to other network members, who can quickly verify its validity. Once the block submitted by the node and the validity of the proof-of-work are recognized by the majority of network nodes, that node will receive a certain amount of Bitcoin. The Bitcoin issued by the system is called "block subsidy," which is the only way to increase the supply of Bitcoin, just as mining is the only way to increase the supply of gold. For this reason, the process of obtaining new coins is referred to as "mining." In addition to block subsidies, the first node to complete the proof-of-work will also receive transaction fees from the transactions contained in that block. The sum of the block subsidy and transaction fees is the block reward.
Nodes compete to perform proof-of-work, which at first glance seems like a waste of computing power and electricity; however, proof-of-work is crucial for the operation of Bitcoin.
To give digital goods a reliable and high production cost, so far, only proof-of-work is the way. It is precisely because electricity and computational power must be consumed to produce new coins that Bitcoin has the potential to become hard currency. Only solving proof-of-work requires a large amount of computational power and electricity, and nodes that expand their computational power have a strong incentive not to package invalid transactions in their blocks. The cost of verifying the validity of transactions and proof-of-work is far less than the cost of solving proof-of-work; therefore, if a node attempts to mix invalid transactions into a block, it will almost certainly fail, rendering the computational power cost spent on proof-of-work wasted.
Proof-of-work makes the cost of packaging blocks extremely high while the cost of verifying block validity is extremely low, which almost eliminates anyone's motivation to create invalid transactions. If someone attempts to do so, they will only waste electricity and computational power without receiving block rewards. Therefore, Bitcoin can be understood as a technology: it converts electricity into real transaction records through the consumption of computational power. Nodes consume electricity in exchange for Bitcoin rewards, so they have a strong incentive to maintain the integrity of Bitcoin. Due to the economic incentives for honest nodes, from its inception to today, the Bitcoin ledger has never had any discrepancies, and double-spending attacks on confirmed transactions have never succeeded. In fact, this integrity of the Bitcoin ledger does not rely on the honesty of any party. Bitcoin relies entirely on verification, without needing to trust anyone.
Attackers need to control the majority of the network's computational power to insert fraudulent transactions into the Bitcoin ledger. Honest nodes in the network have no motivation to do so, as it would undermine the integrity of the Bitcoin ledger, decrease the value of the block rewards they receive, and waste the electricity and resources they have invested in mining. Therefore, the only hope for attackers is to control more than 50% of the network's computational power, verify their fraudulent actions themselves, and write them into the Bitcoin ledger, pretending that this is a valid transaction. In the early days of Bitcoin, when the total network computational power was very small, such things were still possible. However, since the economic value of the Bitcoin network at that time did not exist or was negligible, it did not attract such attacks. As the Bitcoin network grew, the computational power brought by users increased, and the cost of attacks became prohibitive.
Network nodes can earn block rewards by verifying transactions, so controlling computational power is profitable. As of January 2017, the total computational power of the Bitcoin network was approximately equal to the total computational power of 20 trillion consumer laptops, a number that is 2 million times greater than the computational power of the world's largest supercomputer and 200,000 times greater than the total computational power of the top 500 supercomputers in the world. By directly monetizing computational power, Bitcoin has become the world's largest single-use computer network.
Another factor promoting the growth of computational power is that the verification of transactions and the solving of proof-of-work problems have shifted from personal computers to specialized mining machines, which are specifically designed for optimal performance of Bitcoin software. ASICs (Application Specific Integrated Circuits) first appeared in 2012, and their deployment has further improved the efficiency of computational power in the Bitcoin network. Using ASICs, no electricity is wasted on computing units unrelated to Bitcoin calculations. The globally distributed network composed of mining machines safeguards the integrity of the Bitcoin ledger. Besides verifying transactions and solving proof-of-work, these mining machines have no other uses. If Bitcoin were to fail for some reason, mining machines would become useless, and investors' investments would be lost, so they have a strong incentive to maintain the integrity and credibility of the network.
If someone wants to tamper with the transaction records of the Bitcoin network, they would need to invest at least hundreds of millions of dollars to develop new ASIC chips. Even if someone successfully tampered with the transaction records, they would unlikely gain any benefits because the value of the Bitcoin network would plummet due to their attack, potentially even to zero. In other words, to destroy Bitcoin, attackers would need to incur enormous costs without receiving any returns. In fact, even if such a scheme succeeded, the honest nodes on the network could roll back to the block before the attack occurred, allowing the network to continue operating. Then, attackers would need to continue incurring huge costs to attack the consensus of honest nodes.
In the early days of Bitcoin, users ran nodes to send their transactions while verifying each other's transactions; in fact, each node was both a wallet and a validator/miner. However, over time, these functions were separated. Now, ASIC chips are specifically used to verify transactions and obtain block rewards (which is why they are often referred to as mining machines). Node operators can create unlimited wallets for businesses to provide convenient wallet services for users, allowing them to send and receive Bitcoin without running nodes or consuming computational power. In this sense, although Bitcoin is no longer a purely peer-to-peer network between nodes, the network is still composed of numerous nodes, and its operation does not rely on any single party; the decentralized and distributed nature of the network has been preserved intact. Moreover, it is precisely due to the specialization of mining that the computational power behind the network has grown to such an astonishing scale today.
In the early days, when Bitcoin had almost no value, the network was easily hijacked or destroyed by hackers. However, as the network gained some value, people could be free from such concerns. The increasing value of the Bitcoin network may make it more attractive to attackers, but at the same time, the rising cost of attacks has also become more apparent, resulting in no attacks being truly successful. From another perspective, perhaps the real protection of the Bitcoin network is that at any time, the value of the network's tokens entirely depends on the integrity of the network. Any successful modification of the blockchain, theft of coins, or successful double-spending attack would lead network members to feel that the Bitcoin network is no longer secure, significantly reducing the demand for using the Bitcoin network and holding coins, causing the price of Bitcoin to collapse, ultimately leaving attackers with no benefits. In other words, the armor of Bitcoin is not only the high cost of attacks but also the crucial point that a successful attack would render the spoils worthless. As a completely voluntary system, the network can only operate if it is trusted; otherwise, people will abandon it.
The decentralization of computational power, the strong resistance to code changes, and a stable monetary policy are the reasons why Bitcoin has survived and grown to its current scale. It is hard for newcomers to Bitcoin to imagine how many logical and security challenges Bitcoin has overcome to reach this point. The internet has created endless opportunities for hackers, who attack various websites and networks out of interest or profit. Computer networks and email servers around the world are exposed to various security vulnerabilities every day; these systems only provide attackers with opportunities for data or political gains, while Bitcoin is a valuable asset. Thinking of it this way makes Bitcoin's achievements today even more remarkable. The enormous value of the Bitcoin network and its ability to operate securely and stably is because it has always operated in a highly hostile environment, facing relentless trials for a long time. Programmers and hackers around the world have attempted to challenge it in various ways, but Bitcoin stands firm.
"The essence of Bitcoin determines that since the release of version 0.1, its core design has been fixed and will never be changed."
— Satoshi Nakamoto, June 17, 2010
So far, Bitcoin's resilience is not only reflected in successfully repelling external attacks but also in its strong resistance to any attempts to change Bitcoin or alter its characteristics. Most skeptics have not fully recognized the power and implications of this statement. If Bitcoin is likened to a central bank, it would be the most independent central bank in the world; if Bitcoin is likened to a country, it would be the most sovereign nation-state in the world. The sovereignty of Bitcoin stems from the fact that everyone knows that the consensus rules of Bitcoin determine that no one can control it. It is no exaggeration to say that no one can control Bitcoin; people's only choice is to use it as it is or not use it at all.
This immutability does not mean that Bitcoin software cannot be changed; for anyone with programming skills, changing it is easy. This immutability arises from the economic effects of Bitcoin as a currency and network; the difficulty of change lies in getting every user in the network to accept the same modification. Bitcoin is open-source software, allowing individuals to run nodes connected to the Bitcoin network. Bitcoin was initially developed by Satoshi Nakamoto in collaboration with the late Hal Finney and other programmers. Since then, anyone can freely download and use the software and modify it. The open-source nature creates a free competitive market where anyone can freely modify or improve the software and submit it for user use.
For a long time, hundreds of computer programmers from around the world have voluntarily spent time improving node software and enhancing the functionality of individual nodes. These programmers have completed many different implementations, the most popular of which is called "Bitcoin Core." Besides Bitcoin Core, users can also use other Bitcoin software completed by different developers to connect to the Bitcoin network and can freely modify the source code. The only requirement for nodes to join the Bitcoin network is to adhere to the consensus protocol shared by other nodes. If a node violates the consensus rules, altering the blockchain structure, transaction validity, block rewards, or any other system parameters, the transactions submitted by that node will be rejected by all other nodes.
The process of defining Bitcoin parameters is a perfect example of what Scottish philosopher Adam Ferguson referred to as "the product of human behavior, not the product of human design." Satoshi Nakamoto and Hal Finney completed the working model of Bitcoin in January 2009, but since then, Bitcoin has made significant progress. Through the selection of thousands of running nodes and the contributions of hundreds of developers, the Bitcoin code has undergone significant changes. There is no central authority deciding how Bitcoin software should evolve, nor can any programmer determine any outcome. Practice has shown that the key to the adoption of a particular improvement is to follow the parameters of the original design. In terms of changes, improvements to Bitcoin software can be more understood as enhancing the interaction between individual nodes and the network rather than altering the Bitcoin network or any of its consensus rules. A detailed discussion of these exceeds the scope of this book, but to summarize: if a change makes a node inconsistent with other nodes, all other nodes must update; only then can the initiating node continue to remain in the network. If a group of nodes collectively adopts new consensus rules while the remaining nodes do not follow, a so-called hard fork will occur.
Although they are excellent, Bitcoin developers cannot control Bitcoin; they can only influence Bitcoin to a certain extent if the software they provide is used by nodes. Not only can developers not control Bitcoin, but miners cannot either, regardless of how much computational power they possess. No matter how much computational power miners waste on invalid blocks, they will not gain the recognition of the majority of network nodes. If miners attempt to change the consensus rules, the blocks they produce will only be ignored by other network members, wasting computational power for nothing. Only if miners package blocks containing only valid transactions according to the existing consensus rules can it be said that miners can influence Bitcoin to a certain extent.
Since neither developers nor miners can do so, it seems that the people running the nodes control Bitcoin. However, this judgment is only true in a highly theoretical context. In fact, each node operator can only control their own node, decide which network protocol to join, and determine which transactions they consider valid or invalid. Nodes cannot freely choose their consensus rules because if they choose a consensus rule inconsistent with the entire network, they will be rejected by the network. Therefore, all nodes have a strong preference to keep the consensus rules unchanged and remain compatible with other nodes running that consensus rule. No single node can force other nodes to change their code, leading to a strong collective consensus to maintain the existing consensus rules.
In summary, if Bitcoin developers want their code to be accepted, it is best to keep the original consensus rules unchanged; if Bitcoin miners want to receive rewards and not waste the costs of mining, the best choice is also to adhere to the original consensus rules; if network users want their transactions to settle smoothly, the best choice is also to maintain the original consensus rules unchanged. No developer, miner, or node is indispensable to Bitcoin; if they deviate from the consensus rules, the most likely outcome is to waste their own resources. As long as the Bitcoin network provides positive incentives for participants, no one is irreplaceable. Therefore, from this perspective, these consensus characteristics reflect Bitcoin's sovereignty, and to what extent Bitcoin remains Bitcoin depends on these characteristics and norms. Bitcoin's strong preference for the status quo makes it extremely difficult to change its supply or other important economic parameters. It is this stable equilibrium that has earned Bitcoin its hard currency attributes. If Bitcoin deviates from these consensus rules, its status as hard currency will also be severely diminished.
To my knowledge, there has not yet been a significant coordinated effort to change Bitcoin's monetary policy; moreover, some simpler and more direct attempts to alter certain technical parameters of Bitcoin have also failed. Some seemingly harmless technical improvements are also difficult to promote, due to the distributed nature of the Bitcoin network. It requires the agreement of parties that are unrelated or even have conflicting interests for a change to be implemented. The more participants there are, the harder it becomes for everyone to understand the significance of a change, making it increasingly difficult to reach a common agreement. For everyone, the current state has undergone repeated testing, is safe and familiar, and is stable and reliable. The status quo of Bitcoin can be understood as a stable Schelling Point, incentivizing all participants to persist, as abandoning it would carry a significant risk of loss.
If some members of the Bitcoin network decide to introduce a new version of Bitcoin software that changes certain characteristics of Bitcoin code, and this new Bitcoin software is incompatible with other network members, the result will be a fork, effectively creating two different currencies and networks. As long as someone is willing to continue using the original old network, they will benefit from the existing network infrastructure, mining equipment, network effects, and reputation. For the new fork to replace the old network, it must achieve an overwhelming migration of users, computational power, and all related infrastructure at the same time. If it cannot gain an overwhelming majority, the most likely outcome is the emergence of two Bitcoins. If the people behind the fork wish to win, they must sell their Bitcoins on the original network and hope everyone does the same, causing the price of the old network's Bitcoins to drop while the tokens on the new fork rise, thus driving more computational power and economic activity from the old network to the new one. However, any modification to any characteristic of Bitcoin is likely to benefit some while disadvantaging others, making it unlikely for everyone to reach a consensus and collectively migrate to the new network. More broadly, the reason most people hold Bitcoin is that Bitcoin automatically completes transactions without being influenced by third parties. Such individuals are unlikely to take risks or hand over the discretion to modify the network to organizations submitting incompatible code. Arguing about who constitutes the majority is of little practical significance; what matters is that as long as a group of people adhering to the original network rules exists, the existing system characteristics will be maintained (unless some unknown reason disrupts the operation of the system).
Unless the current design experiences a catastrophic failure, it is certain that a considerable proportion of nodes will choose to continue using the existing Bitcoin implementation, which is far safer for anyone than using a forked network. The problem with using a forked network is that to help the forked network succeed, one must sell their Bitcoins on the original network. What no one wants to see is that they sell their Bitcoins on the old network, move to the new network, and find that there are very few followers behind them, causing the token price on the new network to plummet. In short, if an absolute majority of people are not willing to collectively migrate, no new consensus rules can be implemented, and without overwhelming majority support, parties participating in the new network will almost certainly face economically disastrous consequences. If any new shift succeeds, it will give the initiators of that shift significant influence over the future direction of Bitcoin. However, to succeed, it must gain the support of a large number of holders, and holders can be said to fundamentally oppose any form of authority over Bitcoin, making it almost impossible for them to support such a shift. The existence of these holders makes it particularly dangerous for anyone else to support a fork. This analysis may explain why Bitcoin has so far rejected all attempts to significantly change it.
Coordinating Interests#
It is very tricky for opposing parties to take coordinated actions, especially when many of them are extremely committed to the immutability of Bitcoin from their own positions. Unless some irresistible force arises in the future that forces people to abandon the current implementation of Bitcoin.
For example, if a modification could increase the rate of new Bitcoin issuance and increase the mining rewards for miners, miners might like this proposal, but existing holders would likely not, so holders are unlikely to agree to such a modification. Similarly, if a proposal increases the block size of the Bitcoin network, it would benefit miners, as they could package more transactions in one block and receive more transaction fees, thus increasing the returns on their mining investments. However, long-term holders are unlikely to support such a modification; they would worry that larger blocks would make the entire blockchain too large, raising the costs of running full nodes, thereby reducing the number of full nodes in the network and making it more centralized and vulnerable to attacks. Developers create software for running Bitcoin nodes but cannot impose changes on anyone. They can only submit code, and users freely choose to download the code and software versions they prefer. Code that is compatible with the current Bitcoin implementation is more likely to gain user acceptance and downloads than incompatible code, as incompatible code must wait until an overwhelming majority of users in the network use it to be effective.
Thus, Bitcoin exhibits a strong preference for the status quo. So far, only small, uncontroversial changes have occurred, and every attempt to make large-scale changes to Bitcoin has ended in complete failure. This pleases long-term holders of Bitcoin, as they value Bitcoin's immutability and resistance to change the most. Among these attempts, the most notable has been the "scaling" attempts (increasing the size of individual blocks to increase the network's transaction capacity). There have been several projects attempting to scale, garnering support from many prominent and early Bitcoin participants, and vigorously seeking public support. Gavin Andresen is one of the most well-known figures associated with Bitcoin; he, along with many stakeholders (including some technically skilled developers and wealthy entrepreneurs), actively promoted several attempts to give Bitcoin larger blocks.
Initially, Gavin Andresen and a programmer named Mike Hearn proposed "Bitcoin XT" in June 2015, aiming to increase the block size limit of Bitcoin from the then 1MB to 8MB. However, most nodes preferred to maintain the 1MB block size and refused to upgrade. Subsequently, Mike Hearn was hired by a "Financial Institution Blockchain Alliance" to apply blockchain technology to financial markets, while an article in The New York Times praised Hearn as a hero desperately trying to save Bitcoin, claiming that due to the lack of recognition for heroes, Bitcoin was irreversibly heading towards failure. Hearn declared that "the Bitcoin experiment has failed," stating that the lack of growth in transaction capacity was a fatal obstacle for Bitcoin, and announced that he had sold all his Bitcoins. At that time, the price of Bitcoin was $350, and two years later, the price of Bitcoin had increased by more than 40 times, while the "Blockchain Alliance" he joined had accomplished nothing.
Gavin Andresen did not give up and immediately proposed a new fork under the name "Bitcoin Classic," still aiming to raise the block size to 8MB. This attempt also failed. By March 2016, the number of nodes supporting Bitcoin Classic began to decline. Next, the large block faction gathered again under the banner of "Bitcoin Unlimited" in 2017, this time with even greater momentum, including the world's largest mining machine manufacturers and super-rich individuals controlling the bitcoin.com domain, who spent countless resources promoting the large block movement. The media hyped it up, creating a sense of crisis for everyone following Bitcoin news on mainstream and social media. However, the fact is that the large block faction still did not succeed, and most nodes continued to run the 1MB version of Bitcoin.
Ultimately, in August 2017, the large block faction hard-forked a version of Bitcoin called "Bitcoin Cash." Bitcoin Cash vividly demonstrated the fate of a forked coin that did not gain significant consensus. Most people chose to stay on the original Bitcoin network, and the entire economic infrastructure remained concentrated on the original Bitcoin network. The value of Bitcoin was far higher than that of Bitcoin Cash, and the price of Bitcoin Cash continued to decline, falling to less than 5% of Bitcoin by November 2017. Bitcoin Cash not only failed to achieve economic value but also faced severe technical issues that made it nearly unusable. Since the new chain and Bitcoin use the same hashing algorithm, miners can mine on both chains and receive mining rewards from both sides. The value of Bitcoin is far higher than that of Bitcoin Cash, and the computational power for mining Bitcoin is much greater than that for mining Bitcoin Cash. However, once the mining profitability of Bitcoin Cash increases, a large amount of Bitcoin's computational power will shift over. This presents Bitcoin Cash with an unfortunate dilemma: if the mining difficulty is too high, computational power will leak out, and blocks will take a long time to mine, preventing transactions from being confirmed; if the mining difficulty is too low, computational power will flood in, resulting in blocks being mined too quickly and an excessive increase in the money supply. The supply speed of Bitcoin Cash exceeding that of Bitcoin will quickly deplete the mining rewards of Bitcoin Cash, making it impossible to attract miners in the future. More likely, it will lead Bitcoin Cash to continue hard forking to adjust the supply growth rate in hopes of achieving sustainable mining incentives. Only Bitcoin's forked coins will face this dilemma; Bitcoin itself will not. Bitcoin mining has always attracted the most computational power, and as miners purchase more mining equipment, the computational power continues to increase. However, for Bitcoin's forked coins, with lower value and lower mining difficulty, it is always difficult to resist the ravaging of computational power from higher-value chains.
Bitcoin Cash attempted to challenge and prove who the real Bitcoin is, but it failed. Another attempt to double the block size of Bitcoin, negotiated by many startups active in the Bitcoin economy, was canceled in November 2017 because its proponents realized they were unlikely to gain overwhelming support from the network and would ultimately likely result in another forked coin and forked network. Through repeated experiences, Bitcoin supporters began to look down on such attempts, knowing that no matter how much hype there is, any attempt to change Bitcoin's consensus rules would lead to the birth of another imitation Bitcoin, like so-called "altcoins," which, no matter how many details they copy, cannot replicate Bitcoin's most important characteristic—immutability. Through the above analysis, we can recognize that Bitcoin's advantages do not lie in speed, convenience, or user-friendly experience; Bitcoin's value comes from its unchangeable monetary policy that no one can alter. Any group attempting to change a characteristic of Bitcoin to fork a new coin loses the most valuable fundamental attribute of Bitcoin—immutability—at the moment that coin is born.
Bitcoin is easy to use but nearly impossible to change. Using Bitcoin is entirely voluntary; no one is forced to use Bitcoin. Once you choose to use Bitcoin, you must abide by its rules. Bitcoin is almost impossible to undergo substantial changes; any attempts merely add another meaningless counterfeit. Bitcoin is Bitcoin; you can only fully accept everything about it, abide by its rules, and use the services it provides. For all practical intents and purposes, Bitcoin is supreme: it operates according to its own rules, and no outsider can change those rules. One might even imagine the parameters of Bitcoin as akin to the rotations of the Earth, Sun, Moon, or stars—forces we cannot control; they exist rather than being changed.
[1] Adam Ferguson, An Essay on the History of Civil Society. (London: T. Cadell, 1782).
[2] After Bitcoin's production halved for the first time in 2012, some miners attempted to continue mining blocks with a subsidy of 50 new coins, but this attempt was quickly rejected by other nodes, forcing them back to the original Bitcoin issuance plan.
[3] A Schelling Point, also known as a "focal point," is a tendency for people to make choices in game theory without communication, making this choice because it seems like a natural selection, hoping others will also make that choice. Schelling described it this way: "Each person's expected Schelling point is the choice that others expect him to expect to be made." Since it is impossible to accurately estimate how many Bitcoin nodes there are, for each node, the Schelling point is to maintain the existing consensus rules and avoid change.
[4] Referring to R3CEV. — Translator's note
[5] https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30201f7#.5jvqjf-9lg. — Translator's note
The fact is that the Bitcoin ledger can be accessed worldwide, and this ledger is immutable. As long as the Bitcoin network is running, it will record every transaction that has occurred. Rather than saying Bitcoin is anonymous, it is more accurate to say it is pseudonymous (or named or alias). While it is not guaranteed, it is possible to establish a connection between a Bitcoin address and a person's real identity. Once that connection is established, all transactions related to that address can be traced. When discussing the topic of anonymity, it is interesting to compare the anonymity of Bitcoin with that of the internet: both depend on how well you hide and how serious the seeker is. However, it is more difficult to be anonymous on Bitcoin than on the internet. You can easily dispose of a hardware device, an email address, or an IP address and never use it again, but it is challenging to completely erase the traces of funds on a Bitcoin address. Essentially, the blockchain architecture of Bitcoin is not suitable for anonymity.
This means that for any crime with victims, it is unwise for criminals to use Bitcoin. The pseudonymous nature of Bitcoin means that addresses can be linked to real-world identities, and no matter how many years have passed since the crime, there is no ultimate security. Even years later, police, victims, or any investigators may still find the connection between that address and a real person. The clues left by Bitcoin payments have become the reason many online drug dealers have been identified; it can be said that it is the myth of Bitcoin's complete anonymity that has led them to fail.
In other words, Bitcoin increases individual freedom but does not make it easier for them to commit crimes. Bitcoin is not a magic ring but an inseparable part of a future of peace and prosperity.
One notable type of crime involving Bitcoin is ransomware: invading a victim's computer, encrypting their files, and only decrypting them after the victim pays a ransom (usually in Bitcoin). This form of crime existed before the invention of Bitcoin; the invention of Bitcoin merely made it more convenient to carry out such crimes, and many believe this is the best example of Bitcoin facilitating crime. However, it is the laxity of computer security that allows these attacks to occur. If a company's computer system is locked by hackers and a ransom of thousands of dollars in Bitcoin is demanded, the real issue exposed by that company is far more serious than those thousands of dollars. What hackers seek may be just a few thousand dollars, but if the company's competitors, customers, or suppliers obtain the company's data, their appetite may be much larger than that of the hackers. In practical terms, ransomware will prompt companies to check and eliminate computer security vulnerabilities. This process will lead companies to adopt better security measures and promote the development of the security industry. In other words, Bitcoin monetizes the computer security market; initially, hackers profit from it, but in the long run, quality companies will possess the best security resources.
[1] Stein, Mara Lemos. "The Morning Risk Report: Terrorism Financing Via Bitcoin May Be Exaggerated." Wall Street Journal, 2017.
Hacker Attacks#
Resistance to attacks stems from three characteristics:
(1) Extremely simple design;
(2) Unmatched computational power, which has nothing to do besides protecting the system's simple design;
(3) Distributed nodes, where any change must first gain the unanimous consent of these nodes. Imagine surrounding a school with the infantry and equipment of the U.S. military to protect it from invasion, and you will understand how strong Bitcoin's defense capability is.
Bitcoin is essentially a ledger that records ownership of virtual currency. There are only 21 million Bitcoins in total worldwide, distributed across millions of different addresses, with fewer than 500,000 transactions occurring daily that result in the transfer of Bitcoin ownership. If one were to create a simple system capable of achieving the above functions, the resources required would be minimal. A $100 laptop could do it without interfering with internet access. Bitcoin was not designed this way because relying on a single computer to record transactions would necessitate unconditional trust in the computer's owner, and that computer would be an easy target for attacks.
The security of all computer networks relies on preventing certain machines from being penetrated by attackers and using their records as the final record. Bitcoin does not do this; it takes a completely different approach: it does not protect individual computers and operates under the assumption that all nodes are malicious attackers. Bitcoin does not establish trust in any network member but verifies everything they do. The verification process completed through proof-of-work consumes a large amount of computational power, which has proven to be very effective because it establishes Bitcoin's security on the basis of computational power, simple and direct, unaffected by any access or certification issues. Assuming every node is dishonest, any node wishing to submit a new block to the Bitcoin ledger must incur enormous costs; if fraud is discovered, the costs incurred will be wasted. The economic incentives designed in Bitcoin make dishonest behavior extremely expensive, thus making it very difficult to succeed.
To hack Bitcoin, that is, to disrupt the transaction ledger, fraudulently transfer certain Bitcoins to specific accounts, or render the Bitcoin ledger unusable, a node would need to submit an invalid block on the blockchain and get the network to accept this invalid block, allowing the blockchain to continue extending after the invalid block. However, in the Bitcoin system, the cost of verifying fraud is very low, while the cost of submitting blocks is very high and continues to rise, and the common interest of the majority of nodes in the network is to keep Bitcoin alive. Therefore, the probability of attackers winning this struggle is extremely slim. As the cost of submitting blocks continues to rise, the probability of attackers winning becomes even more remote.
The core of Bitcoin's design is that the cost of submitting new blocks and the cost of verifying block validity are extremely asymmetric. This means that forging transactions is only theoretically feasible but practically impossible in the face of economic incentives. Therefore, the Bitcoin blockchain constitutes the most indisputable effective transaction ledger to date.
51% Attack
A 51% attack is a type of attack where the attacker uses a large amount of computational power to generate two payment transactions for the same Bitcoin, ultimately causing one of the transactions to fail and deceiving the recipient. If a miner controls a large amount of computational power, they can complete proof-of-work first in a short time. The miner can send a Bitcoin transaction A to the blockchain, allowing transaction A to be packaged into the Bitcoin blockchain, so the recipient believes they have received the funds. At the same time, they can fork the Bitcoin blockchain before the block containing transaction A, constructing a forked chain that includes transaction B, transferring the same Bitcoin to another address. Since the miner possesses a large amount of computational power, once the length of the forked chain exceeds that of the original chain, the attack is successful, and the Bitcoin received by the recipient of transaction A will disappear.
The more computational power the attacker controls, the greater the likelihood that the fraudulent chain will surpass the original chain, erasing the original transaction and profiting. The reasoning sounds simple, but achieving it is much more difficult. The longer the recipient waits for confirmation, the lower the probability of the attacker succeeding. If the recipient is willing to wait for six confirmations, the attacker’s chances of success are virtually nonexistent.
In theory, a 51% attack is feasible, but in practice, the economic incentive system of the Bitcoin system makes it nearly impossible. If a miner successfully implements a 51% attack, it would severely undermine everyone's economic motivation to use Bitcoin and the demand for Bitcoin. Currently, a large amount of capital is used for mining, and Bitcoin mining has become a capital-intensive industry; the value of these capital returns (Bitcoin) depends on the integrity of the network, and Bitcoin mining companies will maintain their long-term profits rather than shoot themselves in the foot. To date, no double-spending transaction in Bitcoin has ever been confirmed, let alone a successful attack.
The closest double-spending attack against Bitcoin occurred in 2013 when the website BetCoin Dice suffered losses totaling about 1,000 Bitcoins (approximately $100,000 at the time) due to a double-spending attack. However, the success of that attack was largely due to BetCoin Dice accepting zero-confirmation transactions, significantly lowering the cost of the attack. Even if they had waited for one confirmation, executing the attack would have been much more difficult. This is also why the Bitcoin blockchain is not suitable for large-scale commercial payments: waiting for a new block to obtain one confirmation takes about 10 minutes. If a large payment service provider disregards the risks of zero-confirmation for the sake of convenience, it will become a prime target for malicious actors to exploit with large computational power to execute double-spending attacks.
In general, if recipients do not wait for a few confirmations to ensure the validity of transactions, there is a theoretical possibility of a successful 51% attack. In fact, under the influence of economic incentives, those who possess large computational power will not use their power for a 51% attack. The result is that all who wait for at least one confirmation have never suffered from a 51% attack.
If the purpose is profit, a 51% attack is unlikely to succeed. However, such attacks may not always be motivated by profit; the attacker’s goal may simply be to destroy Bitcoin. Governments or other entities could also build Bitcoin mining farms to gain control of the majority of computational power and then use this equipment to launch continuous double-spending attacks, destroying people's confidence in the network's security. However, the economic attributes of the mining industry would make such attacks unfeasible. Computational power is a highly competitive global market, and Bitcoin mining is the largest, most profitable, and fastest-growing use case for computational power in the world. Attackers may calculate how much computational power they need to achieve 51% and then invest the corresponding costs to purchase mining machines. However, such large-scale purchases would only lead to a significant increase in equipment prices, benefiting existing miners, and more capital would flow into mining. Large-scale procurement would also lead mining machine manufacturers to increase investment, lowering the price of computational power per unit and causing total network computational power to soar. As an outsider in the market, an attacker continuously purchasing computational power would always be at a disadvantage because the growth of computational power not belonging to them would be faster. The result is that the more resources invested in attacking Bitcoin, the faster Bitcoin's computational power grows, making it harder to attack. Therefore, despite the technical possibility, the chances of success in attacking the Bitcoin network are virtually nonexistent when faced with its economic attributes.
Attackers, especially those backed by a nation, may attempt to control (seize) existing mining equipment to attack the system and reduce the security of the Bitcoin network. However, this strategy requires the cooperation of governments worldwide, and the geographically highly distributed reality of Bitcoin mining makes this strategy face significant challenges. A more feasible approach would be to control these devices not physically but through hardware backdoors.
Hardware Backdoors
Another possible way to disrupt or destroy the Bitcoin network is to compromise the hardware devices running Bitcoin software, allowing them to be infiltrated externally. For example, installing undetectable malware on mining nodes could enable outsiders to manipulate this hardware. When a 51% attack occurs, these devices might be shut down or remotely controlled.
Another possibility is to install spyware on users' computers to obtain users' private keys and thus control their Bitcoins. If such attacks become widespread, they would severely undermine the credibility of Bitcoin as an asset and reduce demand for Bitcoin.
Both of these attacks have theoretical feasibility, and unlike the attack methods mentioned in the previous section, they do not need to be completely successful to create enough chaos to damage Bitcoin's reputation and demand. In a situation where there are only a few manufacturers of mining equipment, attacks on mining equipment are more likely to succeed, which is one of the key points concerning Bitcoin's success or failure. However, as the Bitcoin mining industry develops, it will attract more manufacturers to produce mining equipment, reducing the likelihood of catastrophic impacts on the Bitcoin network due to the mistakes of a single manufacturer.
As for attacks on personal computers, such attacks are less likely to cause systemic impacts because there are countless manufacturers in the world capable of producing various personal devices that can access the Bitcoin network. If a particular manufacturer encounters problems, the result is merely that consumers switch to another manufacturer. Moreover, users can generate private keys and addresses on offline computers that are never connected to the internet; a more paranoid approach would be to generate private keys and addresses on an offline device and then destroy that device. The Bitcoins contained in those private keys would be immune to any form of network attack.
The defense against these attacks is especially rooted in the anarchist and cypherpunk orientation deeply ingrained in Bitcoin enthusiasts, leading them to believe that it is better to verify than to trust. Bitcoin enthusiasts are typically more technically skilled than the general public and will be very careful to check the software and hardware they use. The open-source nature and peer review of the code also serve as important barriers against such attacks. Due to the distributed nature of the Bitcoin network, such attacks usually only result in significant losses for a specific individual who is compromised, at most causing temporary chaos in the system, but it is nearly impossible to paralyze the entire network or completely destroy demand for Bitcoin. It should be noted that it is economic incentives that give Bitcoin its value, not any hardware. No single device is indispensable for the operation of Bitcoin and can be replaced. That said, if the manufacturers of Bitcoin hardware become more diverse and no single manufacturer occupies a position of influence over the entire system, Bitcoin will survive better and be more robust.
Attacks on the Internet and Infrastructure
One of the most common misconceptions about Bitcoin is that if important communication infrastructure is shut down, or in other words, if the internet is shut down, the Bitcoin network will be killed. These misconceptions arise from the belief that the Bitcoin network is a network composed of specialized hardware and infrastructure in the traditional sense, which has vulnerabilities that attackers fear. However, Bitcoin is a software protocol that can run on any of the billions of computers distributed globally. Bitcoin has no single point of risk; any hardware device running the Bitcoin protocol is not indispensable. Any computer that can connect to the internet can run the Bitcoin network. From this perspective, Bitcoin is similar to the internet, where the protocol connects computers to form the internet, rather than relying on specific hardware devices. The data flow for transmitting Bitcoin information is not large, accounting for only a tiny portion of total internet traffic. The Bitcoin blockchain only transmits 1MB of data every 10 minutes, so it does not require a large amount of infrastructure like other networks. There are countless wired and wireless data transmission technologies worldwide; as long as one of them is available, Bitcoin nodes can connect to the network. To create a world where Bitcoin users cannot connect, one would have to completely destroy the global information, data, and communication infrastructure. This is clearly impossible; modern life relies heavily on information connectivity, and without the normal operation of communication infrastructure, many critical services and life-and-death matters cannot be accomplished. Attempting to simultaneously shut down the internet and infrastructure would cause significant harm to any society, yet it would still not prevent the flow of Bitcoin, as distributed machines can still connect with each other using their own protocols and encrypted communications. There are too many computers and networks in the world, and too many people using them; no force can make them all stop working simultaneously. The only possible scenario for killing Bitcoin is an apocalyptic disaster, after which no one would care whether Bitcoin lives or dies. Among the various threats to Bitcoin that people often mention, I believe this is the most alarmist.
There is no need for science fiction fantasies to kill Bitcoin, such as destroying the telecommunications infrastructure of all humanity; Bitcoin itself faces much more realistic threats that stem from its fundamental design. The immutable hard currency property of Bitcoin's supply, the censorship-resistant digital cash property that does not require a trusted third party, are all based on the consensus rules of the Bitcoin network, especially the rules governing the money supply, which are difficult to change. As discussed earlier, the reason for achieving the current stable state is that network members are likely to face risks and disadvantages if they wish to deviate from the current consensus rules. The reason it is filled with risks and disadvantages is that there are numerous nodes in the entire network, making coordinated action nearly impossible. Therefore, if the cost of running Bitcoin nodes rises significantly, more and more users will be unable to run Bitcoin nodes, leading to a decrease in the number of nodes in the Bitcoin network. A network with only a few dozen nodes is insufficient to be called a decentralized network; at this point, there is a high likelihood that a few nodes will collude to change network rules for their own benefit or even deliberately sabotage the network.
In my view, this remains a technical threat that Bitcoin must take seriously in the medium to long term. Currently, the main limitation for individuals running Bitcoin nodes is network bandwidth. With the block size limit below 1MB, the situation is still manageable. Increasing the block size through a hard fork would raise the cost of running nodes, leading to a decrease in the number of nodes. However, like the various threats mentioned earlier, this threat exists only theoretically; the actual likelihood of implementation is low because the economic incentives of the system do not favor such behavior. The past few attempts to increase block size have all failed, which is clear evidence of this.
Breaking the SHA-256 Hash Algorithm
The SHA-256 hash algorithm is an essential part of the Bitcoin system's operation. In simple terms, the input to the hashing process can be any data, and through irreversible mathematical calculations, an output is generated, which is a fixed-size string. In other words, it can easily generate the hash value of any data but cannot reverse-engineer the original data from the hash result. However, theoretically, if computing power rises to the level that it can crack these hash functions, all Bitcoin addresses would face the risk of being compromised.
We cannot predict whether or when this scenario will occur, but if it does, it would pose a serious technical threat to Bitcoin. Bitcoin's response would be to switch to a stronger encryption algorithm, but the tricky part of changing encryption algorithms lies in how to coordinate the vast majority of nodes to abandon the old consensus rules and switch to the new consensus rules using the new hash function. The difficulties of all previously discussed forked Bitcoins will become evident here, but at this point, Bitcoin will face a real threat, as holders continuing to use the old consensus rules will be at risk of being attacked. Therefore, we can expect an overwhelming majority of users to choose to hard fork. An interesting question remains: whether this migration will proceed in an orderly manner, whether users will migrate to the same new chain, or whether Bitcoin will split into several branches using different encryption algorithms. The only thing that can be certain is that once the SHA-256 algorithm is compromised, the economically rational choice for network users will be to switch to a stronger algorithm, and they will do so simultaneously.
Returning to Sound Money
Discussions about how Bitcoin could fail or be destroyed mostly focus on technical attacks. However, a more feasible means of attack is to undermine people's economic motivation to use Bitcoin. Any of the methods described earlier are unlikely to successfully attack or destroy Bitcoin because they conflict with the economic motivations driving people to use Bitcoin. Just as prohibiting people from using wheels and knives would not succeed as long as these technologies are useful to people, people will always find various legal or illegal ways to continue using them. The way to get people to abandon a technology is not to prohibit it but to invent better alternatives that eliminate the demand for it. We cannot eliminate typewriters through bans or legislation; it was the rise of personal computers that rendered them obsolete.
The demand for Bitcoin arises from the needs of people around the world; people need to conduct transactions that bypass political controls, and they need a means of storing value that is resistant to inflation. As long as political authorities prohibit and restrict people's transfer of funds, and as long as government currencies can be arbitrarily inflated according to the whims of politicians, the demand for Bitcoin will persist. The continuously slowing supply will cause the value of Bitcoin to appreciate, attracting more people to use Bitcoin to store wealth.
Assuming that the world's banking and monetary systems suddenly revert to the gold standard of the late 19th century, where personal freedom and hard currency are the supreme principles, the demand for Bitcoin may significantly decrease. The scenario might unfold like this: the world turns to the gold standard, leading to a substantial drop in demand for Bitcoin, causing the price of Bitcoin to decline significantly, inflicting considerable harm on Bitcoin holders, which would further increase the volatility of Bitcoin's price, setting back Bitcoin's development by many years. As the volatility of Bitcoin increases, the emergence of a reliable and relatively stable international currency standard would severely diminish the motivation for people to use Bitcoin. In a world where the desires of government control and inflation are strictly limited by the gold standard, the first-mover advantage of gold and its relatively stable purchasing power would pose an insurmountable barrier for Bitcoin, making it difficult for Bitcoin to quickly gain a large user base and thus unable to grow to a sufficiently large scale to achieve any form of stable price.
However, the possibility of a global return to sound money and free government is extremely slim; these concepts are largely at odds with the vast majority of politicians and voters in the world, who have been indoctrinated for generations with the notion that government control over currency and morality is essential for the operation of any society. Moreover, even if such a political and monetary transformation were possible, the decreasing growth rate of Bitcoin's supply would still make it an attractive speculative target for many, which itself would lead to further growth of Bitcoin and a greater monetary role. In my view, the global return to gold as a currency may be the greatest threat Bitcoin faces, but this is unlikely to happen and unlikely to completely destroy Bitcoin.
Another possibility for eliminating Bitcoin is the invention of another sound currency superior to Bitcoin. Many people seem to believe that other cryptocurrencies that imitate Bitcoin can achieve this. However, I firmly believe that any cryptocurrency that imitates Bitcoin's design cannot compete with it, and the reasons will be elaborated in the next section. In short, Bitcoin is the only truly decentralized electronic currency, spontaneously forming a delicate balance between miners, developers, and users, with no single party able to control Bitcoin. The feasibility of recreating a currency based on such a design exists only in theory. The feasibility of Bitcoin has already manifested; any imitation will inevitably be top-down and will become a centrally controlled network, forever unable to escape the control of its founders.
Therefore, when it comes to Bitcoin's structure or technology, no imitation can replace it. Only a completely new design and technology that achieves a new form of digital cash and hard currency could potentially compete with it. Until such technology is born, we cannot predict whether it will appear or when it will appear. Based on years of understanding the development process of digital cash, we all know that this invention is by no means easy.
[1] J.W. Weatherman initiated an open-source project to assess the threats faced by the Bitcoin network; see BTCthr-eats.com.
Not only is internet currency a key element of any fiat currency system, but trust is also essential. Although internet currency does not have a unified measure of value, it remains a form of currency based on credit, and its essence is the exchange of credit. From this perspective, internet currency and virtual financial assets represented do not disrupt modern finance but rather accelerate the speed and process of modern finance returning to its original nature, reinforcing the role of credit exchange and speeding up the return of finance to its roots.
The emergence of this new phenomenon of internet currency has brought new vitality to the financial market. Internet currency is generated based on community credit, and new consumption behaviors can compensate for the existing deficiencies and shortcomings in finance, strengthening the overall concept of credit in society. Internet currency primarily involves participation in consumption behavior, forming a value that accumulates through continuous participation in the virtual world, which helps guide the formation of consumption-driven economic growth.