Sunday, December 22, 2013

A hardfork of the Bitcoin blockchain is coming, here's why

Edit so people don't think I'm just trolling, here's a synopsis:

  1. A major payment provider partners with a large mining hardware provider to process and generate Bitcoins
  2. The miner / payment provider collude to introduce "taint" into the Bitcoin system thus creating a "token" like system of tainted Bitcoins' that casual users whom never spend their BTC outside of this loop use.
  3. The tainted coins grow in size until enough mining power is achieved in the tainted coins that anonymous coins begin to lose value creating a snowball affect and thus an eventual hardfork.

No ads on this site, though if you'd like to join an up-and-coming Bitcoin Exchange, please consider: Bitfinex, and using my referral code (kwr9f922HS) for 10% of exchange fees for the first 30 days. You can go long/short the market and also lend your Bitcoin, Litecoin, or USD to other traders for interest. Thanks.

Bitcoin's underlying technology, "proof-of-work block-chaining" maintains it's integrity through some simple rules:

  1. Distributed consensus of transactions verified by immense amounts of computation power to avoid corruption (SHA hashing block-discovery)
  2. No central code base, meaning core developers could modify the way the software works but a majority of miners would have to "accept" and "implement" this change in order for it to have an affect on the larger ecosystem. (Double blind)
  3. No central servers of mining locations (no single point of failure in the system)

During my conversations with other's in the community, there is lots of discussion about the danger of a 51% attack, and recently more conversation around "coin-taint" (a sort of scaling back of the anonymous characteristics of Bitcoin). The first being a "bridge too far" in my mind, but the later having some interesting consequences.

Here's why:

Today there is no such thing as an 'anonymous electronic transaction' outside of Bitcoin in the world. Most countries in the world follow the same sets of electronic financial transaction rules and regulations in order to participate. See Walter Stanish's excellent explanation here.

Therefore, I submit, that a payments corporation, lets say "Visa", as an example could launch something of a "progressive taint" attack on the Bitcoin block-chain, under the guise of "Bringing Bitcoin mainstream" all the while taking progressively larger control of the network until a hard-fork occurs.

Step 1:

Our corporate payments processor partners with a large institutional retailer (lets say Amazon) and announces the acceptance of Bitcoin! Amazing! Bitcoin can buy anything in the universe that Amazon sells now, and everyone will be turning in their USD for Bitcoins to buy buy buy this Christmas.

But there's a catch - the Bitcoins Amazon/Visa accept for payments may start out as plain ol' Bitcoins, but through a clever use of the block-chain, this large retailer's payment processor can introduce "taint" into the coins that it touchesMarking them in some way so that they can be tracked once they are than sold back into the digital ecosystem.

Step 2:

Miners and users could easily strip out this taint, and tumble the coins, cleaning them so to speak. But one also has to remember that there is a large contingent of mining hardware sitting idol that has long since past it's profitable life.

The payments processor could offer incentives to the miners to begin mining again with their hardware, and pay them a nice premium to hash blocks, so long as the only transaction they include in the blocks include taint for tracking customer information (a valuable commodity to any corporation, and one that the cost of tracking customers spending habits in Bitcoin would easily be worth making)

Bitcoin Mining BORG

Step 3:

Once the the payment processor has captured a large enough potion of mining hardware, they can essentially hard-fork the block-chain into: "tainted and untainted" sets of coin transactions. Tainted transactions with all the history and identifying factors a traditional financial institution requires of it's customers now are useful to the payments processor. Sure "traditional" anonymous Bitcoins will still exist, just like cash, but like the cartels cash, you can't just deposit at your local 'Wells Fargo'.

Feel free to post your disagreements with my theory I would love to read them. This isn't ground-breaking stuff. I'm just pointing out the rather obvious fact that Bitcoin (as it exists today) will never be a mainstream payments system without taint.

Full Disclosure: I actively trade, and mine Bitcoin, and Litecoin, and have worked on a variety of projects in the space. I day trade and so am neither long/or short any positions in Bitcoins for very long.

Other interesting reading on Bitcoin blockchain forking: (Selfish mining paper)