What happens if a monopoly grows in Bitcoin mining and payment processing?

What happens if a monopoly grows in Bitcoin mining and payment processing? Here is a scenario that I have been thinking about. Some big corporation, like the Bank of Amerika, decides that Bitcoin is the future and starts to buy thousands of graphic cards. At the same time the payout for solving a block decreases and many small Bitcoin miners figure the cost of electricity and time is not worth it anymore. But the big corporation is subsidized by the present financial system and shifts profits from banking services into paying for Bitcoin processing until only it and a handful of other large banks control the majority of the Bitcoin network. What happens then? Do they start raising fees and requiring a credit card number to process a transaction?

shoeless joe

Posted 2011-12-28T17:41:19.087

Reputation: 2 129

3I don't think you should use statement like "big turd corporation". Try to keep the amount of derogatory terms to a minimum. – ThePiachu – 2011-12-29T22:34:50.753

@ThePiachu: I agree, and removed the word. – D.H. - bitcoin.se – 2011-12-30T13:03:30.857

It is redundant as everyone inserts that themselves when they read the name. – shoeless joe – 2011-12-30T22:58:30.117

Answers

In that scenario, the corporation could:

Launch a 51% attack at a whim
Pretty much control the Bitcoin economy, driving the prices up or down how it sees fit (at least until it spends all of their Bitcoins)
Control which transactions get included in the block or not. This could require one to use their specific client and thus gain more control over the network
Have a big impact on the Difficulty, as it could turn its machines on and off
Control the rate at Blocks are mined (for example, holding onto a solved block for certain amount of time before broadcasting it)
Control who gets to see the most recent Blocks. With this, they could hold out a long chain of solved Blocks for their own client, and when a standard client would finally mine a block, they could just release a couple old blocks to invalidate that chain

All in all, if you own majority of the hashing power, you can pretty much dictate your own rules, up to what the Protocol allows.

ThePiachu

Posted 2011-12-28T17:41:19.087

Reputation: 41 594

Even if they controlled the majority of the processing (a sinister prospect in itself, as it allows double spend attacks), they can't change the format of the blockchain as recognised by Bitcoin clients. If they started sending invalid transaction blocks, the client would reject them.

However, there is a component of each block that is customisable - I think it's around 50 characters. If they reprogrammed their client software so that it required that 50 characters to contain a credit card number, then as I understand it, it could reject other blocks and dominate the network.

All that said, I don't think it's a realistic scenario. If someone actually pulled that off, I believe the value of Bitcoins would plummet quickly, and minor changes would be made to the client so that block solutions required a different type of hardware to process it (such as used by Litecoin and Solidcoin). The new client would no longer be for Bitcoins though - it would be essentially a new currency. The entity that tried to manipulate the network would lose the value of their investment. In my opinion, this is a such a predictable (and self defeating) outcome that it's very unlikely to be attempted.

Note that it may well be possible to pull off such a feat with specialised mining hardware, such as the ASICs apparently being developed by LargeCoin.

Highly Irregular

Posted 2011-12-28T17:41:19.087

Reputation: 10 514

Thanks for the feedback. Rephrased it to make it clear it's my opinion. Added an interesting link too... – Highly Irregular – 2011-12-30T05:29:41.163

Interesting link. I wonder what the impact ASIC proliferation will in other areas of computing. Much like the GPU was repurposed for bit coin I would expect that someone will find other uses for the ASIC structure. – Chad – 2012-01-03T13:50:29.077

There is no monopoly.

First of all a thousand video cards wouldn't be sufficient. Maybe 20,000 video cards. Still say a company did that and drove the cost of mining down so many people left. That is possible. The second part of your scenario was the bank raising fees and putting in all kinds of restrictions.

The bank can't "raise fees". It can simply choose not to process transactions. If it chooses to put its fees so high that it excludes a majority of transactions then the remaining "fair" miners will see their revenue increase. Eventually that will result in more miners coming back in.

Given the essentially no barriers to entry attempting to form a monopoly is simply a good way to operate at a loss. There is no payday because you can't keep competitors from rejoining the market once you drive (or attempt to drive) prices up.

DeathAndTaxes

Posted 2011-12-28T17:41:19.087

Reputation: 8 269