Analyzing China's Influence on Bitcoin at CESC

analyzing_china.md

Analyzing China's Influence on Bitcoin

Ben Kaiser, Princeton

Why did we pursue this research?

• There's been a lot of discussion and fear about China's involvement with Bitcoin. We wanted to provide more rigor to the discussion.
• Note: will refer to "China" often—primarily referring to a small number of policymaking groups in China who have the power to affect Bitcoin policy.

Why care about China as a threat?

• China challenges Bitcoin's fundamental security
  • Assumption: no party can amass too much power over the consensus process.
  • But China has a powerful position in the mining ecosystem through hardware, mining power, and mining pools.
  • Assumption: miners follow rational economic incentives
  • But China has expressed high-level political goals that can easily supercede economics

Political goals and incentives in China

• There are political goals in conflict with Bitcoin
  • Censorship and surveillance
    • Controlling online speech
    • Tracking spending habits (in large part through WeChat payments)
  • Economic protectionism
    • Capital controls
    • Consolidated regulatory authority
      • Used to be three separate authorities that oversaw banking, securities regulation, finance etc.
      • Now just one organization
• It has overt political goals that would lead it exert control over Bitcoin
  • Single-party, single-ideology rule
    • Repression of dissenting ideas
  • Assertive foreign policy
    • Leading global technology
    • Soft-power influence campaigns

China's capabilities to affect Bitcoin

• Capability to control mining
  • At least 25% of all hash power is in China
  • 74% of all mining pool power is orchestrated in China
  • ASIC manufacturing dominated by China (70-80%)
    • Backdoors? Not really a major threat; would be a major hit to business reputation
    • More likely, these manufacturers would be directed to quietly produce more mining hardware for China itself, and increase China's control over Bitcoin
• Capability for unrestrained regulation
  • Consolidation of authority (Xi Jinping becoming president for life)
  • Decimation of exchange sector
    • Over 90% of Bitcoin exchanges were in CNY up until the exchange ban was implemented in China
  • Manipulation of mining power
    • For years, Chinese government offered incentives to miners to operate in China
      • Discounted prices on land, energy prices, and other tax breaks
      • This fueled the steady growth of the Chinese mining sector
      • China has recently announced news to reverse course and scale down Bitcoin mining incentives
  • In short, China has an ability and readiness to manipulate the Bitcoin ecosystem through regulation
• Capability to control Internet traffic
  • Cross-border traffic (Great Firewall)
    • Packet inspection, injection, and tampering
    • Active probing of endpoints
    • Slowdown
      • Has been done with foreign news services and with Tor
  • Domestic traffic
    • Wide surveillance and censorship by ISPs on behalf of the Chinese government
  • Effect on Bitcoin throughput:
    • Empty % of Bitcoin blocks
      • 2015-2016, Chinese mining pools began mining some empty blocks (around 3-7% of their blocks)
        • Antpool was producing as much as 12% empty blocks per day
      • Why?
        • Full block propagation cross-border (across the Great Firewall) slowed 450%, relative to internally to the Great Firewall
        • Assuming the majority of hash power was not within the Great Firewall, miners outside the great Firewall had a large advantage in connectivity
        • Empty blocks give miners within China a larger advantage
      • Compact block relay allowed miners to send smaller sketches of blocks (~15KB), which made propagation speed independent of block size, and negated this perverse incentive
    • Even though this was most likely unintentional, it gives an example of how traffic slowing can be used to affect Bitcoin significantly

What attacks could China actually do to Bitcoin?

• Censorship attacks
  • E.g., punitive forking, feather forking
• Deanonymization
  • E.g., traffic monitoring, compelled unmasking
• Destabilization
  • Introduce lots of forks, or perform a large double spend
  • E.g., balance attack
    • Partition the Bitcoin network between miners inside China and outside China
    • Then issue conflicting transactions to the group outside of China
    • See which fork takes off outside
    • Then recombine domestic hashpower with the outside fork, thereby executing the double spend
• Disrupt competing miners
  • Block withholding
    • E.g., Selfish mining

Summary

• China is a motivated, capable, and credible threat to Bitcoin
• The goal of this research is not to vilify China or claim that this is likely
• We hope that a clear threat model informs mitigation research