Blockchain Research Insights #4 – Horizon Globex
Will bitcoin be safe if the exchange rate falls?
By Ashish Rajendra Sai
Authors: Ashish Rajendra Sai, Dr. Jim Buckley, and Dr. Andrew LeGear
Affiliation: Irish Software Research Centre & Horizon Globex
Article Category: Security
Why this article? : Bitcoin and other cryptocurrencies are subject to the constant changes in real world value, e.g., the volatile exchange rates. This volatility may impact the participants of the network who spend a considerable amount of computational energy on the network. This computational cost often translates to a real-world expense that must be paid for by the incentives. If the incentives are less than the total expenses, than the mining equilibrium does not hold true. In this adverse situation that miners may decide not to stay honest to the network.
Horizon Globex with our research partner Lero has conducted a thorough investigation into this potential lack of incentive and its direct impact on the security of the blockchain.
Background: Cryptographic assets such as Bitcoin and Ethereum provide distributed consensus with a Proof-of-Work protocol and incentive-based engineering. The consensus is inherently dependent on the value of the asset as this is the incentive. The value of these assets frequently fluctuates, which in turn influences the incentive component of the consensus mechanism. Notably, for a proof-of-work consensus to be secure, the participation reward must have perceived real-world value (incentive). But perceived real-world value is not guaranteed: The recent 70% drop in the value of Bitcoin versus the US Dollar may be precipitating a cycle of declining security for the platform, which we explore in depth in this research.
In our security model, we use the optimal selfish mining and optimal double-spending attack strategies to evaluate the security of the blockchain using simulation. We examine the rationale of the miners to define if they should participate in the mining process after recalibration. The rationale is depended on the incentives. We derive a “hash-power distribution model” that can then be used to study and predict the relationship between the difficulty of mining (D), and the attackers hashing mining proportion (α) after every Ndr blocks. The output of this simulation is then used with a Proof-of-Work classifier to measure the resilience of the blockchain to the attacks under various incentive settings such as the exchange rate of the cryptocurrency, reduced reward for mining and variable transaction fee.
The reward for honest behavior keeps the PoW blockchain secure. The real-world value of the rewards for mining is subjected to numerous internal and external factors. Due to its volatile nature, the value of these rewards may lead to a less secure network. We derive a hash power distribution analysis model to measure the profitability of miners under different incentives towards an assessment of bitcoin security. That is, we objectively measure the impact of different incentive settings on the security of the Bitcoin network. We report that with the fall in bitcoin’s exchange rate, there may be a fall in the overall hashing power of the network, which may prove of significance importance to attackers.
Our model predicts a significant increase in the attacker’s mining proportion (α) when the value of BTC drops to US$ 3000 as there is a considerable drop in overall hash power of the network. The model’s prediction was observable in real-world data, in a post-model-formation correlation period, when the price of BTC dropped to US$3000, with a significant drop in overall hash power of the network.
Implications for the greater blockchain community:
This article provides a fascinating insight into the impacts of bitcoin’s exchange rate. The research suggests a low value of Bitcoin may result in the compromise of the security promises. This high dependence of bitcoin on social factors may introduce a new range of attack vectors that have not been thoroughly investigated so far.
We ask the blockchain community if the present form of Proof-of-Work will prove to be sufficient in the future as well? Should the incentive to stay honest to the network be in the form of fiat currency?
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