By James Lawrence - Knowledge - 2 months ago

China’s Potential Threat to Bitcoin and Continued ‘Blockchain not Bitcoin’ Stance

A report published by academics from Princeton and Florida International Universities has suggested China has both the means and motive to adversely affect the Bitcoin cryptocurrency. Within the paper, researchers speculate Bitcoin is in “ideological opposition” to China, whether true or not, this mantra, has been reflected by China’s growing ‘blockchain not Bitcoin’ stance. The People's Republic of China (PRC) has developed an increasing interest in blockchain and has pushed the nascent technology into a growing number of fields while continuing its austere attitude toward cryptos. China is successfully employing blockchain tech without engaging with its decentralized ethos.

Titled The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin, the report, published October 5, proposes China as “one of the most powerful potential adversaries” to Bitcoin. Researchers Ben Kaiser, Mireya Jurado, and Alex Ledger detail China’s threats to security, stability, and viability of Bitcoin due to the countries dominant position in the crypto’s ecosystem as well as and in relation to the government’s near-absolute control of domestic politics, economics, and internet infrastructure.

Kaiser, Jurado and Ledger first explore the decentralized nature of Bitcoin and the precarious nature of its system of operation and maintenance, as a major threat to the system, relying on individual miners to be “kept honest by a carefully balanced incentive scheme.” Through the process of increasing hardware specialization, mining has become more centralized in mining pools. This increasing pooling of Bitcoin miners leads the trio to suggest the most well-understood form of attack, the 51% attack, as a worrying possibility. Taken from the paper: “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China”

If a single party were to control over 50% of the Bitcoin hash rate they would be able to manipulate it to their whim, the Chinese government’s “strong, centralized control” over their citizens allows them “a variety of tools at their disposal to influence those pools and Bitcoin in general”.

“74% of the hash power on the Bitcoin network is in Chinese-managed mining pools. Pool miners cannot be directly controlled by China, but the managers are located within China and as such are subject to Chinese authorities.”

The paper also substantiates claims that China’s Great Firewall imparts a latency overhead for miners outside of China’s border. The process slows traffic of the entire Bitcoin network, making it more inefficient in transaction throughputs as well as resource heaviness. China’s Great Firewall (CGF) regulates China’s internet domestically and censors internet access internationally to its citizens. The CGF, according to the researchers, imparts some factor that applies to Chinese miners, but not others, that has incentivized the mining of empty blocks.

Despite empty blocks taking the same time and energy to mine, they do contribute anything to the network. Detailed by researchers, “Chinese pool group produced an unusually high rate of empty blocks, spiking up above 7%. Meanwhile, non-Chinese miners produced empty blocks at a historically consistent rate of around 2%. These observations suggest that some factor that applied to Chinese miners – but not other miners – created an incentive to mine empty blocks. We posit that this factor is the Great Firewall, and more specifically, the bandwidth bottleneck it imparts.”

The paper highlights the threat potential China’s mining supremacy allows, especially when paired with China’s social policy. The research goes onto identify four attack classes China would be able to carry out and what would be gained from each form of attack. They are as follows: Censorship would entail censoring specific users or miners to achieve an ideological statement, law enforcement or foreign influence. Deanonymization would be an ideological statement or a process of law enforcement for the PRC. Weakening consensus would destabilize Bitcoin as an ideological statement and give China foreign influence. Disruption to competing for mining operations would increase Chinese control over mining. Combined these four classes contain a total of 19 possible attack types and any number of ideological goals or level of control, achieved for China.

Authors of the article speculate China would attack Bitcoin as it is in “ideological opposition” to Chinese governing philosophy, “[China] may be motivated to weaken or destroy it to make an ideological statement; for example, demonstrating the futility of decentralized control paradigms,” the paper reads. “Virtually any violation of Bitcoin’s security suffices to achieve this goal as long as it is highly visible.”

As pointed out by The Next Web’s Hard Fork, one should note this paper has yet to be peer-reviewed so may be seriously hyperbolic, but the evidence was enough for researchers to state, “We conclude that China has mature capabilities and strong motives for performing a variety of attacks against Bitcoin.”

While conclusions drawn by Kaiser, Jurado and Ledger’s paper are fraught with disaster, the overarching sentiment pairs quite well with China’s continuing hostile stance toward activities related to crypto, all the while expressing a more open and engaged attitude to blockchain.

As recently as October 8, it was reported in China’s official state-run press agency Xinhua, that Hainan Province became the host of the country’s “first” officially licensed “‘blockchain pilot zone”. This is after China Blocks Foreign Crypto Exchanges To Counter ‘Financial Risks’ and continues to push cryptocurrency bans throughout the country.

Despite China’s thorough banning of crypto, they appear to remain committed to supporting blockchain in both the public and private sector. Earlier this year in May, President of China, Xi Jinping openly praised blockchain and emphasized China’s need to focus on such nascent technologies in the future.

"A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain is accelerating breakthrough applications," Jinping said, according to a translation of his remarks.

This may seem counterintuitive or even hypocritical of China, to embrace blockchain while chastising cryptocurrencies built on the very same technology, and this is a fairly reasonable assessment. China’s embrace of blockchain may well be hypocritical, the preferential treatment speaks to the PRC’s desires of the technology.

Chinese authorities believe decentralization and currency do not mix. At all. This was perfectly underlined by Sheng Songcheng, a senior counselor to the Peoples Bank of China, who said that blockchain-based technology needs to stay away from the financial sector:

“My views on the blockchain are, first, blockchain should not be combined with currency due to its greatest feature of decentralization. But monetary policy is one of the most important economic policy tools for countries around the world. This characteristics not only prohibits decentralization but also means that governments must have a monopoly on currency issuance, […] This will not be disrupted in the long term.”

Much of the Chinese economy relies on government protection to regulate the market and stop international firms coming in and upsetting the market. The PRC’s stability and legitimacy are in a complex balance with economic growth and the effectiveness of Chinese exports. A balance that would be potentially shifted catastrophically (for the government) if cryptocurrencies were to be introduced in China.

As suggested in The Looming Threat of China, Bitcoin may very well be in “ideological opposition” to the PRC, to the extent at least, that Bitcoin could challenge the government’s legitimacy as proportional to its disruption to the economy.

Bitcoin was built with blockchain at its core, and blockchain was imagined with decentralization as a core mantra, the PRC’s stance couldn’t be much further from this. China’s growing influence in Bitcoin mining has resulted in a massive process of centralization of the crypto and ultimately a threat to the entire network. China’s push into developing blockchain while continuing bans on cryptocurrencies expose their ambitions with blockchain. The PRC has much to gain from the inherent characteristics of blockchain such as immutability, efficiency, and traceability, as every nation does, but China chooses to leave it out of economy and decentralization out of the equation all together.