Jameson Lopp, the CTO at Casa, a Bitcoin focused security company, notes that since the industrialization of BTC mining began in 2015, there have been concerns regarding the concentration of hashpower within Chinese borders.
Hashpower is the computing power needed to secure the Bitcoin network, or the amount of computing resources directed towards the cryptocurrency network in order to validate new blocks of transactions.
Lopp argues that hashpower is concentrated in China because the majority of the world’s semiconductor production facilities are located in Asia. It’s a well-known fact that most of the mining chips are made in Asia. Moreover, Lopp points out that China has a lot of cheap energy at its disposal.
Although there are many nations that provide access to affordable electricity, Lopp claims that “in general, they are not sufficiently industrialized or politically/economically stable enough to support large scale mining operations.” He adds that China is among the few countries with the right combination of appropriate infrastructure and energy abundance needed for maintaining large-scale and efficient Bitcoin mining operations.
Lopp reveals in a blog post:
“Much of this mining power operates at 2.5-3c / kWh in Inner Mongolia during the dry season via cheap coal and wind power, but during flood season, these miners migrate significant capacity to Sichuan and Yunnan provinces to take advantage of 1c/kWh hydroelectric power.”
He claims that there’s much more electric power that’s produced than there’s demand for consumption, which leads to really low prices.
Lopp notes that the Cambridge Centre for Alternative Finance has determined that during Q1 2020, 70% of the total BTC network hashrate came from China. However, he points out that these metrics are based on a number of assumptions and their accuracy isn’t verifiable.
A study from last month, which was commissioned by the Fidelity Center for Applied Technology, found that about 50% of the world’s BTC mining power capacity is “likely” based in China. But the researchers pointed out that mining is a “secretive” industry and they estimated that they were only able to accurately identify just 15% of all Chinese cryptocurrency mining facilities.
“Why do people get concerned about more than half of hashpower being located in China? Because of the infamous ‘51% attack’ against which Bitcoin is susceptible. The interesting thing about 51% attacks is that they don’t break any of the rules of machine consensus. So what are the ramifications of pulling off a 51% attack? It somewhat depends upon the motives of the attacker.”
While many people perceive 51% attacks to be quite serious (which they can be), Lopp notes that they are not able to “arbitrarily” steal user’s Bitcoin. These types of attacks are only able to double spend (using the same coins for more than one transaction) their own Bitcoin, Lopp explains.
The hackers who carry out 51% attacks are not able to change the blockchain consensus rules, Lopp clarifies. He adds that these attackers also “can’t make invalid transactions become valid.”
He goes on to explain:
“If a 51% attacker is seeking to maximize their profit then the juiciest target for a double spend is going to be an exchange. Mine a bunch of coins, send them to an exchange, convert them to a different censorship resistant cryptocurrency or stablecoin, withdraw those funds, then release a bunch of blocks that were mined in secret that send your original UTXOs that were spent in a deposit to the exchange back to your own wallet.”
But then the drawbacks, according to Lopp, of this type of attack are that exchanges with adequate liquidity (which makes them “attack-worthy”) will impose withdrawal limits. These exchanges will also require AML/KYC, so the hacker would have to first try to compromise a verified exchange account which has relatively high limits.
Lopp also notes that the value of the Bitcoin that the hacker holds after the attack will “likely have decreased substantially, thus a successful large attack could actually result in shooting yourself in the foot.”
He points out that hackers must be extremely careful not to leak their IP addresses because then they can be easily identified. This actually happened recently and the hacker ended up refunding $25 million worth of stolen funds because he was scared he might get caught after his IP address was revealed.
“There are probably a thousand+ mining farms scattered throughout China; it would take some effort for the government to seize them all. I suspect it would be nearly impossible for the state to start seizing control of mining facilities without the news leaking to the rest of the world. If we heard of such activity taking place, you can be sure that Bitcoin stakeholders would start planning emergency actions.”
He believes an easier or more effective way to attack might be to go against Bitcoin mining pools. At present, about 70% of hashpower is “being coordinated through fewer than 10 mining pools” that are all based in China, Lopp confirms.
He claims that it’s “far more feasible” for a nation state to attack 10 targets located within its borders, all at once, instead of them attacking a thousand of them at one time.
He continues to note that switching crypto mining pools is “incredibly easy” for miners.
“Once again it becomes a question of being able to perform an attack covertly. Given how many independent entities are observing activity on the Bitcoin network, it’s practically guaranteed that within a matter of minutes an alert would be sounded and miners would start looking into taking action against malicious actors.”
Lopp predicts that in the long-term, we may see semi-conducter foundries based outside of Asia begin to manufacture more mining chips and countries with even more affordable power sources should become more industrialized. This will help with providing more competition when miners start looking for new locations to establish their operations.
“China’s [Bitcoin] mining dominance is unlikely to last; I expect that this theoretical attack will become less and less likely.”