The Strategic Dynamics Of Bitcoin Reserves: A Game Theory Perspective

(MENAFN- crypto Breaking)

Bitcoin operates through a decentralized consensus mechanism that is underpinned by carefully designed incentive structures. The primary and essential principle states that the blockchain with the highest amount of computational work is the legitimate one. This straightforward rule eliminates the need for a central arbiter, allowing the legitimacy of the blockchain to be determined by the collective efforts of numerous decentralized participants, each striving to propagate the chain. The miner subsidies continuously push the blockchain forward, generating significant opportunity costs for those miners who fail to mine the most recent block. These elements, along with the dynamic difficulty adjustments, establish a game theoretical foundation for a blockchain that has progressed steadily, block by block, with nearly complete reliability for the past 15 years.

The key concern arises when a miner or a coalition of miners achieves control over more than 50% of the network's hashrate. Such a scenario would enable them to rewrite recent blocks, prevent other miners from creating future blocks, and dictate which transactions gain entry into the official ledger . This would be catastrophic; the fundamental aim is to prevent any singular entity from exerting control. Hence, the ultimate binding rule embedded within Satoshi's game theory is the necessity of having incentives that deter such centralization attempts. As outlined in the whitepaper:

The incentive structure is designed to motivate nodes to act honestly. If a malicious entity amasses more computational power than all the honest nodes combined, they would face a choice: to exploit that power for fraudulent gains by reversing their own transactions or to generate legitimate new coins. It would be more advantageous for them to play by the rules, as these rules would yield them greater rewards than they would receive from jeopardizing the system and their own wealth.

This principle is the cornerstone of Bitcoin 's game theory. The system is stable only if at least 50% of the miners are motivated to remain honest, a scenario that has held true since 2009.

A crucial, yet often overlooked aspect of this theory is the reasoning behind why acting honestly is more beneficial. The explanation remains consistent from 2009 through the present: Should the system break, the Bitcoin experiment ceases to exist, and the miner who instigated this failure would ultimately be left with a heap of worthless electronic waste. This concern is what prompted community alarm back in 2014 when the GHash pool exceeded the critical 50% hashrate. The notion of any single party (even if it is a mining pool) gaining control represented a catastrophic risk that the community is keen to avoid.

In the framework of game theory, there exists a theoretical capacity for a group to direct over 50% of the hashrate towards dishonest practices, creating a potential constitutional crisis. However, the consequence of such a crisis would likely result in mutual destruction among miners and holders alike. This serves as the ultimate deterrent to misconduct.

It's important to note that the potential for a 51% attack is always looming, regardless of the current hashrate or the costs associated with electricity, cooling, or new ASIC hardware. This inevitability follows from the simple fact that 51% is always less than 100%: At any given moment, a malicious pool could form with 60% of the miners joining forces. Nevertheless, in recent times, all miners have willingly opted to mine the most recent block. It ultimately boils down to incentives rather than mere feasibility.

For individuals outside the mining ecosystem, who do not possess ASICs, the security structure is designed specifically to protect against system attacks. However, this security model also safeguards against threats arising from participants within the system. Miners don't just shield the network from external threats but also protect it from the actions of other miners.

Take, for example, selfish mining . This strategy mathematically demonstrates an advantage for a coalition of 34% of miners employing this tactic beyond a difficulty adjustment phase. Selfish mining does not involve outright theft or censorship; rather, it simply offers a higher return on investment for those miners in the coalition. Recent assessments indicate that roughly 30% of the shares in leading public mining firms belong to miners. Factor in a few sizeable private mining operations, and we approach the threshold for selfish mining . Does this suggest that selfish mining is likely to occur? All that is needed is for 34% of miners to convene and initiate the process; within three weeks, they could begin reaping substantial rewards. Yet, to this point, no miner factions have attempted this strategy. Why?

Engaging in selfish mining would signify a drastic deviation from established norms; crossing this boundary could plunge Bitcoin into a tumultuous struggle among competing factions. The ultimate prize for the victor would be monopoly control, allowing the dominant miner to retain all transaction fees and block rewards, while also reducing their hashrate to optimize profits and dictate fee structures. However, this scenario would spell disaster for Bitcoin , which is why no miner alliances have pursued this route.

I dedicated a chapter in my book to coalitional game theory, scrutinizing precisely this dilemma concerning monopoly mining . The analysis essentially contrasts the profits gained by a coalition controlling 51% of the network that splits rewards from a monopolized chain against the diminished returns for the broader coalition that maintains a competitive approach. In the network's formative years, the answer was evident: monopoly mining would be disastrous, providing no incentive for a coalition to form.

If the U.S. government (USG) commits to a long-term investment in Bitcoin , they will effectively create a system that cannot fail. It simply cannot. Regardless of who mines Bitcoin or who may feel excluded, the system cannot succumb to failure, and it won't. In the event of a constitutional crisis regarding mining , resolution will occur in a clear and decisive manner.

There are various ways to address a constitutional crisis, especially when considering centralized options. Initially, these alternatives might have been regarded as inferior compared to outright failure, but with failure off the table, all possibilities can and will be entertained. A straightforward assertion of 51% control by USG-backed miners is one approach (which doesn't necessarily need to involve censorship). Another feasible solution could be a permissioned soft-fork that restricts new blocks to those generated by publicly traded mining companies. Options also include transitioning to a Proof of Stake model, or converting Bitcoin 's UTXO set into a CBDC with transactions validated by the Federal Reserve, thereby expanding Bitcoin 's reach quickly and greatly benefiting early investors.

The crux of the matter is that under such circumstances, monopoly mining would no longer equate to systematic failure. Any coalition of miners could opt for monopoly mining , beginning with selfish mining and gradually expanding their coalition to achieve 51% control. As long as their actions do not antagonize the USG, they should have no capacity to disrupt the system. In fact, even if they were to establish monopoly mining , the USG would still be positioned to support Bitcoin .

In summary, the USG's involvement with Bitcoin 's future strengthens the network against centralization threats; it effectively strips Bitcoin of its ultimate means of defense: the possibility of failure.

It seems improbable that miners operating with slim profit margins would continue the facade of decentralization when it might be more lucrative for them to unite and engage in monopoly mining , an endeavor that isn't explicitly prohibited by the rules.

This article was authored by Micah Warren. The views expressed herein are solely those of the author and do not necessarily reflect the positions of BTC Inc or Bitcoin Magazine.

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