Described as bitcoin’s “most powerful adversary,” a new joint research paper by Princeton University and Florida International University examines how the Chinese government can directly impact the decentralized bitcoin network by targeting mining operations which are largely hosted in the country.
“Bitcoin mining has become heavily centralized due to advances in specialized hardware that render commodity hardware obsolete. As a result, miners have congregated into mining
pools: consortia of miners who work together and share profits. As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China.”
The research finds that individuals in China have constituted over half of the total network hash power since 2015. Currently, around 74% of the bitcoin network hash power originates from Chinese-managed mining pools. Although the participants in the mining pool may be global, the managers are located in China and thus they, and their pools, are subject to Chinese control.
“Because managers are responsible for assigning mining jobs and propagating completed blocks, they control the inputs and outputs of their miners, allowing Chinese authorities indirect control over that hash power.”
Centralization of mining operations in China has also led to an imbalance in the total networks share of the hash power. “Blocks found in China are already proximate to a majority share of hash power, so they can reach consensus more quickly than blocks found elsewhere.”
“With respect to centralization, centralized control of nodes or the connections between them can affect the fairness of the protocol. For example, if a miner controls enough of the nodes, they can favor their own blocks to win the forks and earn the block reward. Similarly, if anyone is able to censor the network, they can prevent blocks and transactions from spreading. Thus, to ensure stability and fairness, Bitcoin requires a low latency, decentralized, uncensorable network.”
It is clear from the research that the Chinese authorities have not only take advantage of the centralized mining but has been successful at manipulating the bitcoin market. “They have deployed multiple rounds of restrictive regulations that have upended global and domestic Bitcoin markets…Chinese Internet surveillance has affected transaction throughput.”
There are two levels of centralization at play here. On the one hand there is the centralization of mining alone; and on the other hand, there is the centralization of Chinese government authorities. The only way to combat this growing spot of centralized mining and manipulation is to increase and support mining operations outside of China. The more decentralized the network, the more costly it becomes for any single entity to manipulate it. Thus, in making mining operations more global, it greatly diminishes the ability of the Chinese government, or any other governments, to exert any significant influence on the bitcoin network.