The battle for dominance in the digital asset space just went big. And now it looks like it’ll include political might, too.
According to a story in Forbes Tuesday, “Many in the bitcoin and cryptocurrency industry have expressed concern about how much control [mining concentration] gives China over bitcoin, with the Beijing-based Bitmain Technologies mining more than half the world’s bitcoins.”
American crypto companies have noticed, as well. In a recent interview in Breaker, Ripple’s Chief Market Strategist Cory Johnson stated that the Trump administration was doing its “homework” regarding China’s dominance over Bitcoin, and more specifically, the mining operations that provide the necessary security for Bitcoin’s blockchain.
In recent years China has become the go-to country for Bitcoin mining due to its low electricity costs compared to other nations. Based on a study conducted by Elite Fixtures earlier this year, the cost to mine one Bitcoin in China is approximately $3,172, versus $4,758 in the United States. Contrast China to a country like South Korea, where it costs $26,170 to mine one bitcoin, and the advantage that China has over many other nations becomes clear. Additionally, China’s booming economy allows for spending on hardware and software that is necessary to mine Bitcoin.
How much Bitcoin mining is happening in China? According to a study conducted by Princeton University and Florida International University, approximately 74 percent of all Bitcoin mining hash power is controlled by mining pools located in China. The significance of this should not be lost on anyone who understands Bitcoin’s proof-of-work protocol: a person or entity only needs control of 51 percent of the mining network in order to control how Bitcoin is processed, used, and stored across the network. Any amount over 50 percent control gives the miner the ability to bypass the security protocols inherent in the Bitcoin network allowing for censorship and a wide variety of other attacks on the network.
This centralization of bitcoin would be troubling in any country, but particularly one like China, known for strict laws and regulations, especially when it relates to the internet. The Princeton and Florida study explains that China uses an “on-path surveillance and traffic filtering” system known as “the Great Firewall” that conducts “deep packet inspection (DPI) and active probing of connection endpoints” which can affect Bitcoin traffic flow into and out of the country. Additionally, another system, the “Great Cannon,” “inject[s] malicious code into packets in transit and [conducts] denial-of-service attacks by redirecting traffic to a target host.” These systems are used on internet traffic between China and other countries, however, China also maintains control over all the internet service providers (ISPs) in country which allows for regulators to collect and analyze data flow domestically.
The Princeton and Florida study outlines four goals that China may want to reach with an attack on the Bitcoin network. These are:
- Bitcoin stands in ideological opposition to China’s centralized governing philosophy, so they may be motivated to weaken or destroy it to make an ideological statement; Virtually any violation of Bitcoin’s security suffices to achieve this goal as long as it is highly visible.
- The government may attack Bitcoin for the purpose of law enforcement: administering capital controls or preventing other illegal activity. Targeting specific users for deanonymization and censorship would allow China to crack down on illicit uses of Bitcoin.
- Although China has expressed distrust of Bitcoin, it may still determine that increasing control over the system is beneficial. By disrupting non-Chinese mining pools, especially those with significant hash power, China could further increase the proportion of hash power it can control and thus exert more influence over Bitcoin.
- As Bitcoin becomes more widely used and more tightly integrated into global financial systems, it becomes a possible vector for attacking foreign economies.
It is this last point that potentially has the Trump administration wary of China’s control over Bitcoin and its network. Cory Johnson stated in the above interview that:
“The White House in particular seems to be thinking about what it means to have 80 percent of bitcoin mining taking place in China and a majority of Ether mining taking place in China. When you look at XRP, there is no mining, so from a foreign-control aspect…XRP is a very different beast. And in conversations we’ve (Ripple) had with the administration, they seem to get that and think that might matter.”
Bitcoin and XRP achieve ledger consensus in a totally different way. Whereas Bitcoin relies on “miners” to conduct proof-of-work to secure its blockchain, the XRP Ledger (XRPL) requires consensus only among its validating nodes to secure its network. The XRPL’s standard for consensus requires that 80 percent of the validating nodes agree to the order of the transactions being recorded in the current “block” or ledger.
David Schwartz, Ripple’s Chief Technology Officer, has stated on numerous occasions that the protocol used to secure the XRPL is very resistant to censorship, in part because of other validating nodes that validators choose to trust. This trust between validators is found in the Unique Node List (UNL) that each validator chooses to use (a brief understanding of the consensus process and the function of the UNL can be found here). Ripple has even reduced its power over the XRPL to under 50 percent by taking one of its own validators offline for every two independent validators it adds to its UNL. The XRPL is maintained by validators located geographically across the globe and which are maintained by a variety of businesses, universities, and individuals.
Looking at Bitcoin, Ether, and XRP, one can see the importance of allowing no one person, entity, or government to control the network. Bitcoin’s and Ether’s proof-of-work (PoW) and proof-of-stake (PoS) operations have, unfortunately, opened the door to potential attacks and censorship of their networks. Used by a country like China, the economic and trade power that they can wield on other countries, like the United States, begins to show just how vulnerable their systems are to manipulation. It is no surprise, then, that the Trump Administration would want to ensure that any distributed ledger technology they supported could not be controlled by any nation, whether friend or foe of the United States.
Cory Johnson said that he was “amazed at the open-mindedness” of the Trump administration and with the research they were conducting. Research and understanding like this at the highest levels of the United States government should provide assurance that “those in the know” understand the importance and significance of DLT security for Americans and the rest of the world.
