With Miles Carlsten, Harry Kalodner, and Matt Weinberg, I have a new paper titled On the instability of Bitcoin without the block reward , which Harry will present at ACM CCS next week. The paper predicts that miner incentives will start to go haywire as Bitcoin rewards shift from block rewards to transaction fees, based on theoretical results that closely match up with findings from our new Bitcoin mining simulator. Bitcoin provides two incentives for miners: block rewards and transaction fees. Currently the vast majority of miner revenues come from block rewards, but in the long run they will come primarily from transaction fees as block rewards dwindle. This design decision has been discussed a lot, but in terms of monetary policy and hardly ever in terms of security. There has been an implicit belief that the transition to transaction fees will not affect the security and stability of the block chain, and in particular that it is immaterial whether miners receive (say) 25 bitcoins as a fixed reward or 25 bitcoins in expectation via transaction fees. We reexamine this assumption in our paper, and our findings make disturbing news for the future security of Bitcoin and many other cryptocurrencies. Our key insight is that with only transaction fees, the variance of the miner reward is very high due to the randomness of the block arrival time, and it becomes attractive to fork a “wealthy” block to “steal” the rewards therein. [1] The figure shows a scenario where forking might be more profitable than extending the longest chain. See the paper for a full explanation. Here’s how things could go wrong. Due to the possibility of profitable forking, the default strategy is no longer best; we lay out a menagerie of interesting and bizarre strategies in the paper. The […]
