New SWIFT paper examines snags of large Bitcoin mining pools

The SWIFT Institute has announced the availability of a new paper that investigates Bitcoin mining pools and considers whether an evolution towards smaller mining pools might stabilize the Bitcoin system.

The report, entitled “Bitcoin – the Miner’s Dilemma” by Ittay Eyal from Cornell University, focuses on inherent dangers of mining pools, an essential part of the bitcoin ecosystem.

Bitcoin introduced the mechanism of an open distributed system that can be secured by requiring participants to present proof of work and rewarding them for participation. A natural process leads participants of such systems to form pools, where members aggregate their power and share the rewards. Mining pools enable small miners to operate with a reasonable business risk. However, when these pools grow too big, they pose a great danger to the entire bitcoin system. The dismantling of overly large pools is one of the most important and difficult tasks facing the Bitcoin community.

It is well-known that a pool can attack another open pool by pretending to work on its behalf, and thereby taking a cut of its proceeds, but never contributing by discovering blocks. Since these attacks do not appear to be prevalent, it looks as if pools make the right choice and agree to refrain from attacking each other.

However, the research shows that this is an unstable balance. It is worthwhile for a pool to refrain from attacking only as a part of an overall truce agreement in which it is not attacked. If a single pool starts attacking its peers, it will force them to retaliate. Once this happens, the profitability of public pools will deteriorate, leading miners to choose other pooling options, for example closed pools of miners that trust one another. Such trust circles are naturally going to be much smaller than open public

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