On October 5, 2018, a group of scientists published a study, entitled The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin. Ben Kaiser (Princeton University), Mireya Jurado (Florida International University), and Alex Ledger (a staff member of the Lincoln Laboratory at MIT) concluded that China has the motives for attacking Bitcoin and, more importantly, the necessary resources to do so.
The Mining Valley
According to the data presented in the document, mining pools managed from China have concentrated about half of the hash capacity of the entire Bitcoin network since 2015, and, at the time of publication of the study, China already controlled 74% of the network. As of the end of June 2018, this figure was estimated at 81%, while the top ten mining pools included seven Chinese companies: BTC.com (1st place), Antpool (2nd place), ViaBTC (3rd place), F2Pool (5th place), BTC.top (6th place), BTCC (8th place), and BW Pool (10th place). By the end of November, the balance of forces did not change, as seven of the ten leading pools are still Chinese, but other “compatriots”—DPOOL and Poolin, which now occupy 7th and 8th places by the hash rate, respectively—ousted the BW Pool and the closed BTCC.
The reasons for such a high concentration of miners in China include, above all, cheap electricity, which ensures high profitability of mining because of the Bitcoin network’s structure. The cheaper the electricity, the more power you get, the more resources you have, the more hashes per second iterated, the higher the probability that it is you (your pool) who will find the correct hash and get the next block. According to another study conducted in early 2018, mining one Bitcoin in China requires a third less electricity than mining in the United States.
The graph shows that China closes the list of countries and shares one place with India and lags only after Argentina. Energy at such a low cost is available in China due to its vast reserves of coal, which is the cheapest source of energy, and, at the same time, the most unfavorable for the environment. But China has a relatively soft economic policy and large metropolitan areas, such as Beijing, are known for high levels of smog from coal combustion.
The same method of power supply is used for mining. Costs are reduced even more if one can do without transporting raw materials by building mining farms close to the coal basin, thus processing coal directly into Bitcoins. “Mining as a privacy-preserving one-way exchange. Would be interesting to find the counterpart, but seems there is none,” wrote the founder of the Bitsquare decentralized cryptocurrency exchange Manfred Karrer about this system. For example, the mining valley of China is mainly in remote areas with cheap electricity and land; in particular, in the province of Sichuan and Inner Mongolia.
“Miners can participate in pools managed by China while living anywhere in the world because these numbers do not reflect the share of the hash rate physically located in China […] Miners and pools cannot be controlled by China directly, but managers are located in China and therefore are subject to Chinese authorities. Since managers are responsible for assigning tasks and transferring full blocks to the network, they control the inputs and outputs of their miners, allowing the Chinese authorities to exercise control over the hashing powers indirectly. China has more direct control over hash rates physically located in China. This is a significant part of the total hash rate and is more than is controlled by any other individual country, although the exact number is unknown,” the document says.
In addition to cheap electricity, another advantage of the Chinese miners is that the leading equipment manufacturers are located in China, including Bitmain, which, according to estimates, produced 70% of all ASICs used in 2017.
For a while, the miners were attracted by local regulations: land, electric power, and friendly tax policies of individual provinces, but in early 2018, this course changed dramatically as the government, referring to the high power consumption of miners and environmental protection, began discussing eviction measures against miners, and the initiative was directed primarily against large companies. And then Bitmain, BTC.top, and ViaBTC announced plans to move to more favorable jurisdictions.
The Reasons for the Popularity of Bitcoin in China
Researchers conclude that the popularity of Bitcoin in China is due to the two main economic trends that emerged in the country in 2013: the growth of personal wealth of the population and the favorable yuan exchange rate on international exchanges. Together, these factors led to an increase in purchasing power and a desire to invest. “Since access to investment assets was (and remains) strictly controlled in the Chinese planned economy, Bitcoin was attractive due to the lack of regulations and the potential for significant profits,” the scientists say.
Another reason they see is that mobile payment systems and online payments in China are “much more popular than anywhere else in the world.” “Bitcoin has many similarities with such systems, especially when used through mobile applications wallets because Chinese consumers were probably less indecisive in accepting Bitcoin than others,” the document says.
Finally, the third reason the researchers cite is the “centralized political ideology and strong social control policies” which combines political, social, and ideological motives: “The state heavily controls banks in China, anonymous online communication is prohibited, and service providers are obliged to enforce state censorship of China on their platforms. Bitcoin represented an ideology of decentralization and individual autonomy, which was in direct opposition to these ideas, and its potential in providing means for implementing anonymous and censorship free transactions was radical and attractive.”
Cryptocurrency exchanges in China were doomed to popularity for the same reasons since they were a difficult-to-track instrument for capital outflows (since capital outflows also contradict China’s protectionist policies). The study shows the figures for December 2016, according to which, 98% of the total Bitcoin exchange by that time was made in yuan. “This number seems abnormally high and has led to allegations of inflation or manipulation. One explanation is the unusual structure of the Chinese stock exchanges where trading is free, and withdrawal fees decrease as the user's trading volume increases, thus stimulating false trading activity,” the researchers write, noting that at the time of publication of the work, according to various estimates, China’s real market share varied from 50% to 85%, while remaining dominant.
China versus Bitcoin
The study suggests that China “is threatening the security, stability, and viability of Bitcoin,” by having “political and economic control over domestic [cryptocurrency] activities […] and the Internet infrastructure.” “As the value and economic utility of Bitcoin grew, so did the incentives to attack it,” explained the researchers. “We singled out China for research, because it is potentially the most powerful opponent of Bitcoin, and we found that they have many obvious reasons for attacking the system and a number of mature capabilities, both regulatory and technical, to carry out these attacks.”
The document notes that Bitcoin mining has become “highly centralized” and “more than 80% of Bitcoin mining is carried out by six mining pools,” five of which are managed directly by Chinese companies.
The main threat to the Bitcoin infrastructure is the 51% attack that combined mining pools can make. “The blocks found in China already make up almost most of the hash rate, so that they can reach a consensus more quickly than blocks mined elsewhere,” the document says. “If the Chinese government gains control over the internal hash rate, it will give it an advantage in selecting blocks for inclusion in the ledger, which is important for some types of attacks.”
Golden Shield Phenomenon
The researchers also point out the unfair distribution of rewards, which occurs in Bitcoin, presumably due to such features of China’s Internet space as the Great Firewall. The tool that allows one to benefit from the “closed Internet” is empty blocks. These are blocks that do not contain any transactions, that is, they are useless and even burdensome for the network (since their production still requires computational power), but they are advantageous for the miners because they bring the same reward as ordinary blocks. By owning a large share of the hash rate, Chinese mining pools can have an advantage in choosing which blocks to mine, and this also applies to empty blocks.
The authors of the document looked at the average level of empty blocks and found that from May 2015 to June 2016, the Chinese mining pools produced an unusually large number of empty blocks, which accounted for more than 7% of the total. And in the AntPool and BW Pool pools, these values reached 13%. At the same time, the remaining (non-Chinese) pools routinely mined about 2% of such blocks.
The researchers suggested that the factor that allowed the Chinese miners to speculate on the empty blocks was the principle of the bottleneck bandwidth, which arises because of the Golden Shield. The Golden Shield causes packet loss (block data) during data transfer, thereby limiting network bandwidth. “In 2017, the test showed 6.9% packet loss for connections between the U.S. and China and only 0.2% for connections between the U.S. and Hong Kong, which is outside the Golden Shield. Loss of packets leads to delays, since dropped packets need to be ‘re-requested’ and resubmitted, and this was also considered in this test (218 milliseconds of delay with Chinese agents) versus 81 milliseconds with Hong Kong. It was noticed that these delays affect the transmission of Bitcoin blocks. In 2015, it was found that the transfer of blocks through the Golden Shield was an order of magnitude lower than between nodes within the Golden Shield network. A separate study in the following year revealed that the average transfer time for almost complete Bitcoin blocks was 3.9 seconds between the nodes inside the Golden Shield and 17.4 seconds between the [located] nodes on opposite sides, resulting in approximately 450% slowdown,” as stated in the document. The authors of the study believe that such delays lead to a distortion of incentives for Chinese miners because they have to compete in the mining environment, obviously in a losing position. “If the miner behind the Golden Shield finds the next valid unit at the same time as the miner outside, then the latter can transfer the block to the network more quickly, which means that it is more likely to win the ‘fork race’ and its block will be adopted,” the researchers note. But if the miner mines smaller (empty) blocks, they will weigh less and be transferred to the network faster, thereby leveling the speed limits of the miners behind the Shield.
With such a scheme, miners lose part of the reward, namely commissions from transactions, but, given their share in the total reward for the block, they are easily neglected (in the period of explosive mining of empty blocks, the reward for the block was 25 Bitcoins, 0.25 Bitcoin per block).
The speed limits that made the Chinese miners dishonestly play were eliminated after the BIP152 upgrade was introduced into Bitcoin, which provided compact data transfer, reducing the level of bandwidth needed to transfer new blocks.
How Would You Like to Be Attacked?
The researchers identified 19 types of possible attacks divided into four classes: censoring users or miners, deanonymizing users, weakening consensus and destabilizing Bitcoin, and disrupting the competitive mining environment.
The document contains a table listing the names of the attacks, their goals, nature (visible or secret), “target audience” (users, miners or the ecosystem as a whole), and the resources that China has to carry out the attack.
Many of these attacks, such as block delay, forklift, selfish mining, attack race, Finny’s attack, Goldfinger’s attack (named after the villain from the James Bond series who wanted to destroy the U.S. gold reserves) are directly linked to mining and hash rate, a factor where China now has a considerable advantage.
Why Would China Destroy Bitcoin?
The researchers suggest that Bitcoin is in “ideological opposition” to the centralized management philosophy of China. China “may have the motivation to weaken or destroy [Bitcoin] to make an ideological statement. For example, to demonstrate the futility of decentralized control paradigms. In fact, any violation of Bitcoin security is enough to achieve this goal, if it is sufficiently noticeable,” the study says.
Destabilization of Foreign Economies or Putting Pressure on Them
“As Bitcoin begins to be more widely used and more tightly integrated into global financial systems, this becomes a possible vector for attacking foreign economies […] To influence foreign countries where Bitcoin is used, China may want to weaken or even destroy Bitcoin. This can be achieved if the target of the attack will be certain users or miners, or if you just generally weaken the consensus mechanism to increase volatility to a critical point,” the scientists believe.
Law Enforcement Action
According to the researchers, the government can invade the Bitcoin space to control capital or prevent illegal activities, which will be done by deanonymizing users and censoring transactions or prohibiting specific users from performing Bitcoin transactions.
Increased Control Due to Undermining the Competitive Principles of the Mining System
This goal can be achieved through selfish mining, block delay, and chain ramification after block delay, in which China will “authenticate” its branch and control it.
The researchers have promised to consider existing solutions for threats emanating from China in the future, as well as to analyze and reduce the gaps in these solutions.