by Rod Garratt and Rosa Hayes – Liberty Street Economics, Federal Reserve Bank of New York

In June 2014, the mining pool Ghash.IO briefly controlled more than half of all mining power in the Bitcoin network, awakening fears that it might attempt to manipulate the blockchain, the public record of all Bitcoin transactions. Alarming headlines splattered the blogosphere. But should members of the Bitcoin community be worried?

Miners are members of the Bitcoin community who engage in a process that validates new additions to the blockchain in exchange for a reward that comes in the form of newly issued bitcoins. The process is essentially a tournament, where the likelihood that a miner receives a reward is proportional to the amount of computing power he or she employs. Mining pools are groups of miners that pool their computational resources together and split the rewards. An individual or group of miners that provides more than 50 percent of computational power to the validation process can manipulate the blockchain, but this power is limited by the fact that blockchain is, as mentioned above, a public record; no one can add false transactions to the blockchain.

There are only two manipulations a controlling pool could attempt: refusing to validate specific transactions (which prevents people from sending bitcoins between addresses) or reversing transactions the pool sends during the time it is in control. Such actions would likely lead to a huge decline in the value of bitcoin, if not a complete collapse of the entire system. So would it be worth it for a pool of miners to manipulate the blockchain?

Think of the situation as an infinitely (or indefinitely) repeated game. Is there a one-shot manipulation that will earn the controlling mining pool more than its expected future earnings? If not, then the pool has little incentive to manipulate the blockchain, as doing so would destroy its source of future income. We argue that the incentives for a 51 percent attack are low given the current conditions of the bitcoin market, but that the incentive for such an attack may increase in the future.

The Current Situation

In order to evaluate the costs and benefits of a manipulation one needs to perform a few calculations. The current market price of bitcoin is approximately $400, and twenty-five bitcoins are made available approximately every ten minutes to the miner or pool that solves the required hash problem. Thus, a group that controls 51 percent of all Bitcoin mining revenue would earn .51*25*6*24*$400 or $734,400 per day.