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Author Topic: If JP Morgan and Goldman Sachs owned 80% of the entire Bitcoin mining power..  (Read 7352 times)
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March 09, 2012, 05:19:44 AM
 #1

..would you still use Bitcoin?

I only ask because I foresee a far future where custom ASIC and/or FPGA farms are owned primarily by large entities primarily seeking to profit from minuscule profit margins in the price of coin.

Of course, if they own 40% of the mining power, that's a huge profit.

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March 09, 2012, 05:22:50 AM
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..would you still use Bitcoin?

I only ask because I foresee a far future where custom ASIC and/or FPGA farms are owned primarily by large entities primarily seeking to profit from minuscule profit margins in the price of coin.

Of course, if they own 40% of the mining power, that's a huge profit.

One entity only needs 51% and then they effectively mine as if they have 100%. No one would bother to accumulate 80%. I think this is where bitcoin is headed. It is a great thing.

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March 09, 2012, 06:11:29 AM
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I foresee a far future where custom ASIC and/or FPGA farms are owned primarily by large entities primarily seeking to profit from minuscule profit margins in the price of coin.

In about nine months the block reward is going to drop to 25 BTC (about 3,600 per day).  Let's say that for whatever reason, by that time the exchange rate is about double it rises to $10.  Then it stays at that level for a year.

So that is $36K USD "issued" per day.  365 days/year = $13.1 million for the year of gross revenue for mining.  I'm speculating here, but since competition is global and there is a low barrier of entry, mining profitability (margins) won't get much more than 30%.  So you are talking about $3 million of profits occurring for all Bitcoin mining occuring in the entire world.  I really can't imagine a single large entity even letting thoughts wander towards bitcoin mining.  Particularly not either JP Morgue or the squid.

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March 09, 2012, 06:18:35 AM
 #4

It is beside the point who the entity is. When you go from 49%->51%, your mining profits effectively double, while your costs increase by about 4% [assuming constant marginal costs of hashing]. It is a no-brainer. If you have sufficient resources, then you should aim to set up an honest mining monopoly. If the hashing rewards go down, this makes the emergence of the monopolist even more likely. Fewer resources will be needed to set up the monopoly, so the pool of candidates will widen and there will be less risk involved.

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March 09, 2012, 06:23:28 AM
 #5

JP Morgan and Goldman Sachs probably wouldn't be very good at running a network that actually requires honest hardworking engineers. Lawyers and scam artists wouldn't be very good at defending against DoS attacks.

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March 10, 2012, 01:52:08 AM
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JP Morgan and Goldman Sachs probably wouldn't be very good at running a network that actually requires honest hardworking engineers. Lawyers and scam artists wouldn't be very good at defending against DoS attacks.


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March 10, 2012, 07:25:38 AM
 #7

It's not that simple. You never know if you actually have 49% or 51% and if you choose not to build on others blocks you risk doing work that doesn't end up in the chain later on and doesn't get paid. Monopolistic mining with a narrow margin is a risky game. Also while you might break other miners after a short time you don't know what those with 50-500k bitcoins saved up (and maybe some healthy dollar profits already taken) will do.

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March 10, 2012, 07:33:48 AM
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It's not that simple. You never know if you actually have 49% or 51% and if you choose not to build on others blocks you risk doing work that doesn't end up in the chain later on and doesn't get paid. Monopolistic mining with a narrow margin is a risky game. Also while you might break other miners after a short time you don't know what those with 50-500k bitcoins saved up (and maybe some healthy dollar profits already taken) will do.

51% may be narrow in some sense, but just a few% more and you own with near-certainty. If you discover that you don't actually have 55%, but 49% then you add on a few more % and catch your chain up with the competitive one. Nothing lost.

Moreover, the idea that people would add hashing capacity in the face of a near monopolist is absurd. The opposite would almost certainly occur. The monopolist could probably just sit with 45% and watch as frightened competitors shut down their rigs and handed the field to him.


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March 11, 2012, 09:41:46 PM
 #9

No, that will more likely be driven by the chinese underground shadow banking system Cheesy

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March 13, 2012, 07:12:44 PM
 #10

So if that ever happens bitcoin will effectively flash crash?

Since an attacker can double spend his own coins, he gets to print cash until no one uses bitcoin.

If he is "honest" people might accept him like they do today with the fed despite some casual printing.

With the emergence of all the mining pools having considerable percentages of total hashing power this scenario sounds a bit too likely for my tastes...

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March 13, 2012, 11:22:14 PM
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In my humble opinion, a 51% situation won't be a great thing, it will spell the end of Bitcoin as we know it. Such a case (a single majoritary entity rejecting blocks found by everyone else) will basically nullify half of the Bitcoin network contributors' revenue stream. That means all other miners will suddenly find themselves forcefully pushed out of the game and with no revenue stream from Bitcoin. They will most likely abandon the Bitcoin economy, selling hardware and bitcoins to cut their losses/get whatever money they can out of the ecosystem. Yes, maybe quite a lot of miners also speculate or use Bitcoins for other things, there are also lots of users that don't mine, but when a single entity controls the entire network, Bitcoin ceases to be what it promised to be - a decentralized, uncontrolled means of value exchange. This means the people using it as such will be forced to leave it behind. To assume this won't crash the prices to ridiculous levels is delusional. For all I care the monopolist entity could be Mr. Rogers, it would still make my ass twitch to know my money has to go through somebody that forcefully removed everyone else from the game and they can do whatever the fuck they please with my transaction. Bitcoin was supposed to be better than this...

Unfortunately, I can see where Cunicula is coming from; hashing power being aggregated into larger and larger entities until one reaches the tipping point is something very much possible. When that happens, in order for the network to keep functioning though, we must hope that the 51% entity doesn't abuse it's status. But again, simply the fact that hashing power reached that point will be a major problem.
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March 14, 2012, 02:32:54 PM
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It is beside the point who the entity is. When you go from 49%->51%, your mining profits effectively double, while your costs increase by about 4% [assuming constant marginal costs of hashing]. It is a no-brainer.

This is really what it comes down to. The total hashing power of the Bitcoin network is under 11 terrahash. To obtain, say, 55% of the present hashing power, I just need to go to a consortium of JP Morgan, Goldmans Sachs, etc. and get them to, among themselves, agree to provide me about $15 million dollars. I then spend $15,000,000 to buy ~30,000 FPGAs that mine at ~375 mh/s. That puts my total hash rate at 11.25 terrahash.

Never mind the difficulty of getting all the Spartan processors for my 30,000 FPGAs, if it can be done, there is no reason not to start doing it. And given this mystery miner that is not processing transactions and has about 20% of the network, it appears someone might already be doing this. After all, what's a couple million to a company that makes $1 billion in one quarter.

http://www.huffingtonpost.com/2012/01/18/goldman-sachs-earnings_n_1212627.html

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March 14, 2012, 02:40:23 PM
 #13

So if that ever happens bitcoin will effectively flash crash?

Since an attacker can double spend his own coins, he gets to print cash until no one uses bitcoin.

If he is "honest" people might accept him like they do today with the fed despite some casual printing.

With the emergence of all the mining pools having considerable percentages of total hashing power this scenario sounds a bit too likely for my tastes...

Which is why an entity wouldn't do it.

Building out a network capable of 10TH/s would be a huge huge operation.  It would involve hundreds of people, dozens of warehouses, megawatts of power, and thousands of processing boards. 

Why would someone do that double spend a $100 gold coin at Coinabul and then watch their $20M investment become next to worthless.  It would be like spending $80,000 to rob a 7-11 and "profit" $200.

Someone with 51% of network could mine 100% of the blocks "honestly" and collect all the Bitcoin revenue (transaction fees and block rewards).

TL/DR Version:
Why would they say "You know what having spend $20M+ I don't want the $3M+ in revenue into perpetuity.  I would rather get a couple double spends and piss my investment away"?
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March 14, 2012, 02:42:11 PM
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It is beside the point who the entity is. When you go from 49%->51%, your mining profits effectively double, while your costs increase by about 4% [assuming constant marginal costs of hashing]. It is a no-brainer.

This is really what it comes down to. The total hashing power of the Bitcoin network is under 11 terrahash. To obtain, say, 55% of the present hashing power, I just need to go to a consortium of JP Morgan, Goldmans Sachs, etc. and get them to, among themselves, agree to provide me about $15 million dollars. I then spend $15,000,000 to buy ~30,000 FPGAs that mine at ~375 mh/s. That puts my total hash rate at 11.25 terrahash.

Never mind the difficulty of getting all the Spartan processors for my 30,000 FPGAs, if it can be done, there is no reason not to start doing it. And given this mystery miner that is not processing transactions and has about 20% of the network, it appears someone might already be doing this. After all, what's a couple million to a company that makes $1 billion in one quarter.

http://www.huffingtonpost.com/2012/01/18/goldman-sachs-earnings_n_1212627.html

Good luck with that.  Also.. Why wouldn't Goldman Sach simply give themselves the $15M (probably closer to $20M) and keep all the profit?  You don't honestly think them loaning you $15M would be less risky then them building a wholly owned subsidiary to do the mining themselves do you?
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March 14, 2012, 07:13:36 PM
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I'm not suggesting they would do this to double-spend. I'm suggesting they would do this to own most of the future Bitcoin. This ensures their dominance in the financial world. They don't care about how you spend your coin or who makes the laws, they'd just want to own all future coin, essentially.

You guys are aware that most physical commodities and mining companies and the ETFs that arbitrage for them are owned by subsidiaries of JP Morgan and Goldman Sachs (or other large banking institutions), right? Why would Bitcoin be any different? They just want control of anything that is anything at all related to investment. Later on, when 2040 is approaching and it looks like profits are going to zero, they will convince the developers and other miners that a little bit inflation is an OK thing. Hell, they might do it by 2020, even.

I guess the point of asking the question was rhetorical: of course you will all still use Bitcoin if all the largest financial entities own all of the mining power. And you'll still use it when they start inflating coin.

And that's my point. Whoever of us works the best deal out for the largest financial institutions the first and fastest is going to be the most wealthy going forward.

I was trying to figure out when they were going to introduce "USCoin" or something to compete with BTC, then I realized just how stupid it would be to introduce an alt-coin when you can just buy control of Bitcoin ("the most trusted cryptocurrency in the world", "worked on by thousands of super-smart hackers", etc.) for a few million apiece via a banking consortium. Essentially, by buying miners, they buy us, and all the trust the public place in our technical prowess. It's ingenious.

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March 14, 2012, 07:24:44 PM
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Well USCoin would have some interesting uses.  I could see a USCoin, EuroCoin, YuanCoin, and YenCoin (and probably GoldCoin, SilverCoin, OilCoin, etc) co-existing along side BitCoin.
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March 14, 2012, 07:28:43 PM
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when they were going to introduce "USCoin" or something to compete with BTC,

Who is "they"?  When was this?

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March 16, 2012, 09:59:12 PM
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I've written about this a few times.  Bitcoin is BigGovernments *wettest ever dream*.  Imagine the scenario where one entity has the 51% hashing power.  They get to approve - or not - ALL transactions.

1. Not an ApprovedBitcoinUser ©?  Rejected!
2. Not enough transaction fees (a.k.a. tax)?  Rejected!
3. Transacted coins coming from an UncertifiedAddressFromBeforeTheTakeover ©?  Rejected!

Think about it.  EVERY SINGLE TRANSACTION is there for the powers-that-be to see, both before and after approval.
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March 17, 2012, 04:27:12 AM
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I've written about this a few times.  Bitcoin is BigGovernments *wettest ever dream*.  Imagine the scenario where one entity has the 51% hashing power.  They get to approve - or not - ALL transactions.

1. Not an ApprovedBitcoinUser ©?  Rejected!
2. Not enough transaction fees (a.k.a. tax)?  Rejected!
3. Transacted coins coming from an UncertifiedAddressFromBeforeTheTakeover ©?  Rejected!

Think about it.  EVERY SINGLE TRANSACTION is there for the powers-that-be to see, both before and after approval.

This whole thing is simple enough to fix. Release an updated version of the client that rejects blocks that were created by a host that refuses to process an excessive number of transactions. This will prevent abusive monopoly.

In other words: If a host is being too picky, ignore any blocks from that host and fork the chain in favor of a more friendly host who processes more of the unconfirmed transactions.

This would require the creation of a "jerk-detection algorithm", which would require analysis of several factors, including the value of the voluntary fee on each transaction, the number of transactions rejected, and statistical analysis of the distribution of those two factors.

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March 17, 2012, 05:16:25 AM
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This whole thing is simple enough to fix. Release an updated version of the client that rejects blocks that were created by a host that refuses to process an excessive number of transactions. This will prevent abusive monopoly.

In other words: If a host is being too picky, ignore any blocks from that host and fork the chain in favor of a more friendly host who processes more of the unconfirmed transactions.

This would require the creation of a "jerk-detection algorithm", which would require analysis of several factors, including the value of the voluntary fee on each transaction, the number of transactions rejected, and statistical analysis of the distribution of those two factors.

The problem seems quite difficult to me.

The host could generate a large volume of dummy txns and these could carry arbitrarily large fees. The host mines all the fees anyway, so to him that fee-paying txns just transfer money between pockets. His willingness to pay fees will greatly exceed that of all other users. He could generate enough dummy txns to max out the txn size limit. If he does this, some txns will need to be excluded from each block in order for the blocks to be valid.  How can anyone determine what the valid exclusions are if the accounts are anonymous?

The most general solution is create adequate incentives for a monopolist to not behave abusively (these are already in place to some degree, but proof-of-stake would improve them)


Another way of using incentives to mitigate this problem is to require destruction of some portion of the txn fee. I don't think anything greater than extremely small rates of destruction would be a satisfactory solution however because it imposes a tax on the user base.

Another solution is to remove the block size limit and perhaps you could require all txns to be included [not sure if this is technologically feasible]. However, presumably, the block size limit was included in the first place out of security concerns.

You could also create some algorithm to identify dummy accounts and real accounts. The problem is that the monopolist would also know the algorithm and would likely be able to game it unless incentives were put in place to make gaming costly (e.g. destruction of some coins used in txn fees). I don't think this will be satisfactory either.


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