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Could a malicious actor (e.g. government) attack the network by introducing significant compute power into the network, and once the difficulty grows very high, withdraw all resources from the network.
This could dramatically increase the time it takes for transactions to be confirmed, as well as makes it not profitable for other miners. Granted this would only last until the difficulty is readjusted, but perhaps it could be enough to shake public confidence in the network.
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Yes it is possible. You already answered your own question:
"This could dramatically increase the time it takes for transactions to be confirmed, as well as makes it not profitable for other miners. Granted this would only last until the difficulty is readjusted, but perhaps it could be enough to shake public confidence in the network."
There are other attack vectors (such as certain Sybil attacks, Finney attacks, 51% attacks or attacks on blockchain immutability such as the ETH hardfork proposal in response to the recent attack on the DAO) that could have a far greater impact on public confidence than a temporary difficulty adjustment.
If the attacker could generate enough hash rate to engage in a double spending attack, that would also have a much larger impact than changing the difficulty as you describe.
1Could you clarify the relevance of DAO contracts in the context of network attack? The DAO exploit based on my understanding is no threat to the network. It is simply a broken contract to begin with. – renlord – 2016-06-20T03:04:11.743
@renlord I just meant that hardfork proposals that involve altering the immutability of the blockchain (such as the ETH hardfork proposal) could cause a large percentage of the network to lose faith in the Bitcoin. Thankfully this type of hardfork proposal has yet to gain significant support in the history of Bitcoin. Even after the Mt. Gox and other large hacks, a hardfork to recover losses was never seriously considered to recover stolen Bitcoin. The Bitcoin blockchain is trusted in large part because of its immutability. – Yao Choa – 2016-06-20T20:11:35.933
This seems fairly far-fetched for Bitcoin, as Bitcoin's hashrate is almost completely composed by specialized hardware. However, quite a few altcoins had to deal with this sort of hashrate influx. Some of them introduced the Kimoto Gravity Well difficulty adjustment as an answer.
– Murch – 2016-06-20T21:55:33.443