How could Bitcoin be destroyed? There are a few ways this could be engineered. In this section, we will take an in-depth look at each method and assess its likelihood. 

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1) The 51% Attack

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This is where bad actors hijack 51 percent of the Bitcoin network. In order to understand the likelihood of this happening, you need to understand the hash rate.   Bitcoin mining is the process of solving highly complex cryptographic problems. If you cast your mind back to high school algebra where you had to solve for x, you will remember how you would test different combinations to find the right answer. Take that same problem, and instead of two variables, you have numerous variables. You now need to test millions of combinations. Hash rates are measured by the number of guesses each computer makes per second to solve for the hash on a blockchain network. This is an essential part of the crypto mining process on a proof-of-work (PoW) network.

 

Because there are typically hundreds (or thousands) of computers making millions of guesses per second, the hash rate is typically measured in terahashes, or 1 trillion hashes, per second. For example, the Bitcoin network hash rate is measured in terahashes per second.  Smaller networks may be measured in smaller increments, such as kilohashes per second (1,000/s), megahashes per second (1 million/s), or gigahashes per second (1 billion/s). The higher the hash rate, the more difficult it is for bad actors to attack the network. 

 

The hash rate on the Bitcoin network as of October 2022 is around 240 million terahashes per second (or 240,000,000 TH/s). The network first hit a hash rate of 1 TH/s in May 2011 and has increased every year since then, which means it has become progressively more difficult 

 

When the hash rate increases, here’s what it means:

• More computational resources are being used to mine blocks.

• More electrical power is consumed.

• The network increases in security, as it becomes too big to overpower a single entity.

• Mining becomes much more difficult, and most blockchain network algorithms increase the difficulty of mining as the hash rate increases.

 

When the hash rate of a PoW blockchain network decreases, this typically means:

• Fewer miners are competing to add blocks and earn block rewards.

• The network becomes less secure and more vulnerable to a 51% attack, which occurs when a group of miners who control more than 50% of the network’s mining hash rate alter the blockchain.

• Less power is consumed by mining computers.

• Mining difficulty declines, making it easier to mine blocks.

 

When it comes to mining centralization, the big concern that people have is a “51% attack” —  where a single actor or group controls a majority of Bitcoin’s mining power and can effectively decide which transactions (if any) get confirmed in the blockchain.  Besides just disrupting or censoring the confirmation of new transactions, a 51% attack can also be used for a double spend. This means that the attacker mines a different version of the blockchain in secret so that they can spend some coins on the public chain and then later mute the transaction by publishing their version of the blockchain in which they retain ownership of the coins. Another name for this is a blockchain reorganization because it replaces the most recent blocks in the chain.  So far, there have been no successful 51% attacks on Bitcoin in its history, but we have seen successful attacks on other coins like Ethereum Classic. If successful, such an attack would likely cause significant harm to Bitcoin’s reputation.

 

So, what would it cost to execute a 51% attack on Bitcoin? The bad actors would need to amass enough ASICs (mining hardware) and power capacity to attack the network. Experts estimate it would cost in excess of  $5.46 billion in hardware.  In the grand scheme, this may still be a small sum to the likes of the USA or China. However, it doesn’t account for significant obstacles such as the limited capacity of chip manufacturers like Samsung and TSMC to actually produce these high-quality hashing chips. (Not to mention the lunacy of a government using that semiconductor manufacturing capacity to build ASICs and attack Bitcoin rather than any number of other valuable applications.) 

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‍Ultimately, attempting to destroy trust in Bitcoin through a mining attack with a physical hash rate just doesn’t make sense anymore, and it hasn’t for years. Nation states that view Bitcoin as a threat are far more likely to over-regulate or (try to) ban its use than to spend billions of taxpayer dollars on mining hardware and power. Still, that doesn’t mean that 51% of attacks are completely impossible. Let’s now turn our attention back to the synthetic hash rate. This time, instead of talking about hash rate exchanges and cloud mining, we’ll discuss mining pools.

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Bitcoin mining pool centralization has been a near-constant source of FUD (fear, uncertainty, and doubt) for years. However, it's usually misrepresented. Mining pool operators have long-term stakes in the Bitcoin network and just as little incentive to attempt an attack as miners themselves. A more interesting case to think about is if the Chinese Communist Party (CCP) were to try taking over several mining pool operations. Before the Chinese ban on Bitcoin in 2021, approximately 97% of Bitcoin’s total network hash rate goes through Chinese pools. This percentage is now 21 percent and the leader is the United States at 38 percent. But even if China were to reverse this ban and the percentage of Chinese pools had to rebound, it needs to be remembered that miners can switch pools in a matter of seconds. If the CCP were to attempt to take over the largest pools, they would have to hope that no miners switch to other pools so that they can sustain the attack for more than a few pointless minutes.

 

The less concentrated the hash rate is in a few mining pools, the more difficult it would be to attempt a pool attack. However, mining pools are necessary for most miners today to stabilize their revenue, and concentration in a few pools is unavoidable. Therefore, one good way to increase the difficulty of a mining pool attack is to make it impossible to do it covertly. In other words, the attack causes more damage the longer it is sustained, so it can be mitigated by ensuring that some miners would detect it within minutes and switch pools. 

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It is important to understand Bitcoin mining pools, why they exist, and whether they are a threat to Bitcoin. We have already discussed the possibility of a government taking control of pools and potentially using that to orchestrate a 51% attack. Miners can quickly change pools in the face of this, but it is worthwhile having a better understanding of these pools.
 

Why do mining pools exist? If the average person wants to get into Bitcoin mining, they will need to acquire mining hardware, set this up, plug it in and start mining. At the current hash rate, it is unlikely they will get far on their own, so it makes sense for them to throw their resources into a pool which increases their chances of being awarded a coin.  Multiple miners in the same network can speed up the discovery process by reducing latency or delays and speeding up the computations. The biggest downside of pools is that there is a centralization of the validation and creation process. Control then becomes an issue because mining farms essentially control the rewards. One of the main disadvantages of joining a mining pool is that you'll need to pay recurring fees and split any cryptocurrency that is successfully mined with the rest of the pool. Fees are usually paid through your share of the cryptocurrency that is awarded to the group.

 

Cryptocurrency mining has transitioned from an operation distributed over individual computers to centralized mining pools involving big investments. Mining pools are not inherently bad for cryptocurrency, but they have become a concern because of the control and influence exerted by small groups of well-funded people. Given these small groups of well-funded people have an interest in the overall success of Bitcoin, it is unlikely they will do something to undermine the integrity of Bitcoin because that would negatively affect their business.

 

2) Governments
 

Governments are powerful and as soon as they see Bitcoin developing into a threat to their fiat currencies, they will act. Can Bitcoin withstand a full-blown government onslaught? Let's start off with a Bitcoin ban.  Bitcoin is decentralized and not subject to government regulation. However governments, upon providing valid reasons, could pass a law that prohibits Bitcoin as a currency. The first major country to ban Bitcoin specifically and cryptos, in general, was China. The official reasons provided by the People's Bank of China were to curtail financial crime and prevent economic instability.

 

There are good reasons for governments to be fearful of cryptocurrencies. The biggest concern is the ability of cryptos to evade restrictions on cross-border financial flows. China places an annual limit of $50,000 for the purchase of foreign currencies as part of its already strict capital controls. Those in favor of capital controls say that keeping capital within the country makes domestic credit more easily available for that country to grow. They also argue that economic crises have been more frequent since Bretton Woods capital controls were relaxed. 

 

Before crypto, the rich in China got around capital controls by purchasing foreign real estate, creative invoicing for international trade, and even coercing employees to use their personal allowances to transfer money into bosses' offshore accounts and then reimbursement locally. Bitcoin was far easier for them to flaunt capital controls. A strict ban on crypto however is difficult to enforce on account of the existence of the over-the-counter market. Chinese are able to buy a stablecoin, which is legal, in the over-the-counter market and then send it to any exchange in the world to buy Bitcoin or any crypto in the market. 

 

So what is the OTC market? A government ban such as we saw in China was a ban on crypto mining, transactions, and exchanges. The OTC market, however, is almost impossible to ban. It is a framework of financial technology that enables trading markets outside a regular exchange. It is a private trading market for the buying and selling of crypto. The OTC market brings together buyers and sellers in private. If you are looking to buy Bitcoin, the OTC market will find someone who is selling. If you buy Bitcoin on an exchange, you never meet the seller - the seller is effectively the exchange. 

 

The OTC trade occurs when both parties agree on the trade price. A trade can be crypto to crypto (for example swapping Bitcoin for Ether) or fiat to crypto. The need for the OTC desk to effect the transaction is imperative. They could act on a principal or an agency basis. The principal desk is one that takes the other side of the trade. So, if you want to buy BTC, they will sell and then attempt to buy on the other side to maintain a zero delta. On the agency side, the desk endeavors to find a seller for the buyer and will take a fee for that. OTC markets are more difficult to regulate because they are private markets. It is like you buying a second-hand bicycle from your neighbour. It is going to be difficult for governments to regulate those kinds of operations. 

 

This also gets around the problem of using crypto. If governments ban crypto, it is unlikely that large supermarket chains will be willing to risk accepting payments in Bitcoin, but that does not preclude the use of it for private transactions such as buying a car or other immovable assets that are less regulated.  Governments can also bring down Bitcoin by competing with it.

 

What is interesting is that some governments may even be embracing Bitcoin. In July 2022, Vladimir Putin signed into law a new bulk "prohibiting the use of digital assets, such as cryptocurrency and NFTs, to pay for goods and services". The implications of this new law were simple. Russians are still able to purchase cryptocurrency but no vendor could take their Bitcoin in exchange for, say, groceries. In September, the Kremlin softened its anti-crypto stance allowing residents to send cross-border payments using crypto. The reason behind this is that Russia is starting to see the benefits of crypto as a means to get around economic sanctions, as centralized financial institutions like SWIFT which is responsible for international payments seek to exclude "rogue" nations from their network. 

 

In November 2022, Matthew Ferranto from Harvard published a paper entitled Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves.  The paper kicks off by mentioning three counties confirmed to have incorporated Bitcoin in their reserves. They are El Salvador, the Central African Republic, and Ukraine. Ukraine received over $100 million in crypto donations, and a deputy minister at the Ministry of Digital Transformation said that the use of crypto could be a "breakthrough from an economic standpoint". 

 

When the United States effectively froze half the foreign currency reserves of Russia, shock waves were sent through the hallowed halls of every central bank in the world that was paying attention, as they asked, if this happened to Russia, it could happen to anyone.  It is easy for the United States to hurt countries with sanctions. They sit at the heart of the global financial system. Eighty-seven percent of all global trade is in United States dollars. In addition, counties own trillions of dollars of United States treasury bonds. These are bonds issued by the US government. If you buy these bonds, you are effectively lending money to the US government. Japan has $1.2 trillion, China $970 billion, the United Kingdom $634 billion, and the list goes on. If you do something to piss the US off, they could just freeze those assets because they control them.

 

The administration of sanctions is done through OFAC - the Office for Foreign Asset Control. This organization has the power to impose sanctions on countries, companies, and individuals. It has the power to levy significant fines against entities that defy its directives, including freezing assets and barring parties from operating in the United States or doing business with United States entities and individuals.  So as the world's largest economy and global regulator sets a precedent of freezing assets of governments that either oppose it or side with its enemies, central banks are starting to recognise the benefits of a decentralized asset like Bitcoin as a powerful diversifier in the reserves of their central banks, This could potentially convert some of Bitcoin's biggest opponents into its biggest allies.