Dr. Craig Wright Warns Against Mining Cartels

Dr. Craig Wright Warns Against Mining Cartels

Posted by Justin Connell   

Australian Computer scientist Dr. Craig Wright, who has claimed to be the creator of Bitcoin, founded nChain to accelerate blockchain adoption globally. Since founding the company, he has commented regularly on the bitcoin and blockchain industries.

The Chief Scientist for nChain, Dr. Wright blogged recently about why he believes SegWit poses a risk to the future of bitcoin. (He does support removing the bitcoin blockchain’s “artificial” 1MB block size limit in favor of increased scalability, just not the same way SegWit achieves this).

While 51 percent attacks are “unlikely” in the current bitcoin iteration due to the cost of mining bitcoin, Dr. Wright contends “SegWit opens the door to methods of collusion and mining cartels which could undermine the bitcoin network.”

Claims Dr. Wright in the blog post : “If implemented, SegWit would change this for the worse. It opens the door to an economic incentive model that would encourage mining cartels to form. As the bitcoin network currently operates, there is no incentive for miners to form cartels. Mining pools are not cartels; they are a firm.”

Dr. Wright cites the “AnyOneCanSpend address”, introduced by SegWit, as a fundamental change to bitcoin that could change the digital currency forever. The Australian computer scientist calls this “essentially a blank signature for transactions.”

He goes on: “SegWit uses an ‘AnyOneCanSpend’ address so that transactions will be validated and recorded into blocks, even though the sender/receiver signature data is separated.”

“AnyOneCanSpend” outputs, according to Dr. Wright, would allow any miner to spend funds associated with specific transactions. “[T]therefore, SegWit would introduce new rules for interpreting ‘AnyOneCanSpend’. This means that miners could not take advantage of that output address to inappropriately spend the funds associated with all SegWit transactions.”

SegWit proponents assume “all miners will agree to play nicely, never steal funds, and funds will be locked up safely.” Dr. Wright disagrees.

The self-claimed bitcoin founder says there are “several hundred attack scenarios which SegWit could open.” When a cartel achieves 51% of the network hashing power, it switches to the original bitcoin protocol, thereby changing outstanding SegWit payment as well as the last block payments to AnyoneCanSpend addresses. The cartel can then redistribute the funds to themselves.

“As the volume of payments into SegWit addresses increase, the incentives for miners to defect from the network also increase,” writes Dr. Wright, who says in its current iteration bitcoin grows more secure and less vulnerable to attack as it becomes more widely used.

SegWit modifies the protocol fundamentally in a way opposite to this, Dr. Wright contests. “…[I]t allows it to become more and more vulnerable over time. If (for example) in the first week of a SegWit implementation, there are $100 million worth of transactions under SegWit, governments and other state players with increased incentives to attack bitcoin will benefit. The creation of a cartel secretly formed through a hostile government poses a serious risk to attack and seriously damage bitcoin. Such a cartel would not require an immediate 51% control through the centralised party.”

Cartels, contend Dr. Wright, can use their power to de-seat weaker players. “This strategy would involve finding mining pools that had been formally profitable but, due to a downturn or technological advancements or even changes in energy pricing, are finding it difficult to compete in the existing market,” he writes. “Joining the cartel would give these players a methodology to profitably leave the network. A final attack that is profitable in the short-term could fund the miner’s decision knowing that ongoing competition would be difficult.”

The new player running the cartel would then gain access to the existing market share and be able to buy access to the system at a depreciated price before returning to a system that does not implement SegWit, says Dr. Wright.

“With the flaws in SegWit then removed, the new entrant could gain a competitive advantage, low cost access to the market, and at the same time, subversive control,” he writes. “These scenarios of cartel attacks against the bitcoin network may seem alarmist, but they are very real possibilities lurking behind the SegWit door.”

Dr. Wright is part of a camp that doesn’t believe in “user validation”, Bitcoin core developer Eric Lombrozo told Crypto Insider. Mr. Lombrozo, the CTO and Founder of cryptographic asset development firm Ciphrex, has more than twenty years building enterprise-scale software architecture, information security and systems integration tools. He has been an active participant in the blockchain project collaboration and open-source development industry.

“Users being able to validate their own transactions is key to how bitcoin works,” Mr. Lombrozo told Crypto Insider. “If miners really had the power to change the rules on a whim, Bitcoin would cease to be very interesting. Individual users and businesses validate their own transactions and reject any blocks that break the accepted rules. The inability for a third party to arbitrarily change the rules contrary to the wishes of the users is a key feature of the network and an important source of its value.”

Mr. Lombrozo adds: “There is a bounty on Litecoin for this exact attack which nobody has yet claimed because it’s practically impossible – it would require an extremely long blockchain reorganization. If this were possible to do it would violate the blockchain security model at a very fundamental level.”