October 19, 2021

Why the Cornell paper on Bitcoin mining is important

    Joint post with Andrew Miller, University of Maryland.

Bitcoin is broken, claims a new paper by Cornell researchers Ittay Eyal and Emin Gun Sirer. No it isn’t, respond Bitcoiners. Yes it is, say the authors. Our own Ed Felten weighed in with a detailed analysis, refuting the paper’s claim that a coalition of “selfish miners” will grow in size until it controls the whole currency. But this has been disputed as well.

In other words, the jury is still out. But something has been lost in all the noise about the grandiose statements — on their way to getting to their strong claim, the authors make a weaker and much more defensible argument, namely that selfish miners can earn more than their fair share of mining revenue. [Read more…]

Bitcoin isn't so broken after all

There has been a lot of noise in the Bitcoin world this week about a new paper by Ittay Eyal and Emin Gun Sirer (“ES” for short) of Cornell, which claims that Bitcoin mining is vulnerable to attack. In a companion blog post, Sirer says unequivocally that “bitcoin is broken.” Let me explain why I disagree.

This post has three parts. First, I’ll give some necessary background on how Bitcoin works. Second, I’ll explain the essence of the ES attack. Third, I’ll explain a serious flaw in the logic of the ES paper and why, as a result, the ES attack is not nearly as scary as they indicate.
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The low-transaction-fee argument for Bitcoin is silly

A common argument advanced by Bitcoin proponents is that unlike banks and credit cards, Bitcoin has low (or even zero) transaction fees. The claim is a complete red herring, and in this post I’ll explain why.

Let’s assume for the purposes of argument that Bitcoin transaction fees are, in fact, zero. There are small mining-related transaction fees, but it seems plausible that these fees will always be far smaller than those associated with traditional banking.

Why do banks and credit cards charge those annoying fees? A major reason is fraud. Banks eat the cost of fraudulent transactions, but pass on the cost to the customer by taking a cut of each legitimate transaction. Fraud is not an artifact of a particular system that we can design away — it is inherent to every form of money handled by humans. To compare Bitcoin meaningfully with traditional banking, then, we must ask how big fraud-related losses are for Bitcoin users.

Framed this way, the comparison is not a happy one for Bitcoin. From thefts of wallets to hacks of Bitcoin exchanges, fraud in the Bitcoin ecosystem is rampant. It only gets worse when we add sources of risk other than fraud. A recent study found that 45% of Bitcoin exchanges shut down. Several of the rest have suffered attacks and losses.
[Read more…]