Declining Profitability For New Miners Threatens Bitcoin Decentralization

By September 14, 2016Bitcoin Business

The halving of the bitcoin block reward this past July has changed the profitability of new miner entries, a development that could ultimately impact bitcoin’s decentralization, according to Sveinn Valfells of Flux, Ltd. and Jon Helgi Egilsson of the Faculty of Economics at the University of Iceland. In a paper , “Minting Money with Megawatts” for the Institute of Electrical and Electronics Engineers (IEEE), the authors noted that declining profitability for new miners could further consolidate mining activity. This, in turn, could increase the likelihood of miners colluding to attack the blockchain’s bitcoin transaction history, which could threaten the cryptocurrency’s decentralized character. Bitcoin’s architecture created a payment network independent of central banks and existing financial service providers. Mining Mechanics The paper goes into depth on the mechanics of bitcoin mining. Mining, a computational process, provides a key part of the bitcoin network. The bitcoin transaction ledger is distributed without central copies maintained by trusted parties. A chain of time-stamped transaction blocks comprises the bitcoin blockchain . Cryptographic hashes of the blocks secure the blockchain’s integrity. Each block references the previous block’s hash. How Miners Are Rewarded Miners compete to calculate valid hashes, for which they are rewarded new bitcoins, along with transaction fees. The hash is a one-way transformation of an input string, a transaction block header, into a garbled output string. The block header has several fields of data, including the prior block’s hash, a time stamp, a signature of the transactions enclosed, and a random “nonce” data field. The block header, to be valid, must belong to the subset of outputs, each of which has a specific number of zeroes. The more zeroes, the smaller the subset, and the greater the difficulty of finding a valid hash. The hash gets computed repeatedly, varying the nonce until a […]

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