I am currently attending the Corfu Bitcoin “school” partly supported by our NEXTLEAP project, and gathering some of my favourite researchers, including Joe Bonneau who just presented a lecture on bitcoin mining. He gave a fantastic overview of the evolution of mining technology, leading to large specialized pools of custom hardware located in jurisdictions with cheap subsidised electricity. He dispelled the myth that bitcoin mining consumes vast amounts of energy: it apparently consumes about one coal plant’s worth. He also presented many attacks devised in the literature, including selfish mining and beyond. Interestingly he concluded that those sophisticated attacks would leave traces on the network, and have never been observed.
However, considering that the purpose of bitcoin / proof-of-work type crypto-currencies is to free such systems from the control of nation states the above is quite worrisome. A strategic nation state that seeks to increase control over such a currency has a simple and deniable strategy: such a nation simply has to provide a small subsidy for electricity used to mine. As a result market forces will ensure that a majority of miners will move there; make immovable investments in the form of data centres and mining gear; and eventually be within reach of traditional regulatory mechanisms in that jurisdiction. Preventing such centralizing tendencies would require institutions ensuring the jurisdictional diversity of mining – akin to anti-monopoly regulators – that are antithetical to proof-of-work consensus (unless they could be implemented in a peer-to-peer manner?).
Interestingly, Joe, in his talk hinted that the concentration of mining pools and farms in China and elsewhere might be the result of better deals and state subsidies for electricity. Of course, whether this is the result of a strategic choice to control a crypto-currency or simply a contingent effect is difficult to determine. This proves that such an attack would indeed be very hard to detect as an attack.
It is in fact doubtful if this is, strictly speaking, an attack or simply an instrument of national industrial or foreign policy. After all states have been using modest subsidies to attract, control and regulate industries: London provides a favourable regime for finance, and Greece has good provisions to attract tourism. Thus it is conceivable that a nation may choose to attract and then benefit from such a control over proof-of-work cryptocurrencies. What is certain is that proof-of-work is far from being the silver bullet against centralization and potential state control.