Grossklags, along with Benjamin Johnson, a researcher at the University of California, Berkeley, and Aron Laszka, a research scholar at Vanderbilt University, are investigating how conflicting interests threaten to negatively impact the Bitcoin ecosystem. The overall goal of their research is to provide guidelines for ensuring that the currency remains long-term viable and trustworthy. They presented the results of their study in their paper, “When Bitcoin Mining Pools Run Dry: A Game-Theoretic Analysis of the Long-Term Impact of Attacks Between Mining Pools.”

“Healthy competition is normal,” Grossklags said. “However, we want to avoid down the road that distributed denial of service (DDoS) attacks or other adversarial events are disrupting the overall Bitcoin economy.”

Published in 2008 and released as open-source software in 2009 by Satoshi Nakamoto, Bitcoin is a cryptocurrency system that is controlled through an online communication protocol and facilitated in a decentralized fashion. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the U.S. Department of the Treasury to categorize it as a decentralized virtual currency. While most stakeholders have jointly benefited from the growing importance of Bitcoin, according to Grossklags, Johnson and Laszka, misaligned incentives may undermine the stability of the system.

“In particular, incentives to derive short-term profits from attacks on mining pools threaten the long-term viability of Bitcoin,” they wrote in their paper.

Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into the public ledger. This activity is called mining and is rewarded by transaction fees and newly created bitcoins.

The process of mining new bitcoins is organized in the form of a race in which the miner that solves a proof-of-work task first will be rewarded; all other miners will leave empty-handed. Individual miners have found it beneficial to join forces in the form of mining pools, as averaging mining proceeds across many participants makes earnings more predictable. In fact, a miner working alone may not win any race in a reasonable amount of time.

The specific setup of each mining pool, according to Grossklags, Johnson and Laszka, typically differs across several dimensions which can be tangible (e.g., related to the computing and communication infrastructure) or intangible (such as reputation or details of the payout schemes). The researchers term the sum of these factors the “attractiveness” of a mining pool.

However, the rules governing how Bitcoin operates as a currency leave room for cheats to destabilize the system.

First, attackers may abuse the resources of unsuspecting computer users for mining purposes through security compromises.

Second, attackers may attempt to redirect or siphon off mining capabilities from a competing pool.

Third, attackers may diminish the mining power of competing pools through DDoS attacks or by exploiting weaknesses in the implementation of the procedure/software used by a particular pool.

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