Content

  • Understanding Bitcoin Incentives

  • How does selfish mining work?

  • Does selfish mining pose a threat to Bitcoin?

  • Final considerations


Understanding Bitcoin Incentives

Bitcoin represents a carefully balanced game of incentives. In a decentralized ecosystem, the alignment of participants' interests is vital to the long-term viability of the network. The incentives that direct nodes (nodes) to secure the network are primarily financial – honest users are rewarded. Cheating attempts result in financial losses.

This is apparent in mining. Participants invest large amounts of capital in electricity and specialized hardware, hoping to recoup their investment and earn profits by adding blocks to the blockchain. Miners seek to maximize their returns and the easiest way to achieve this is by following the rules.

If a miner adds a block to the chain, they will receive all fees paid on the block's transactions, as well as an amount of newly created coins. We call these block rewards and the amount of coins received is halved (halving) every 210,000 blocks (approximately every four years). At the time of writing, the reward is 12.5 BTC, but it will be reduced to 6.25 within a few months.

Financial incentives for mining have made it highly competitive, which increases the security and decentralization of the network. Some speculate that these incentives can be manipulated. In this article, we will look at the concept of selfish mining.

If you want to read more about the incentives behind Bitcoin, check out the article An Introduction to Cryptoeconomics for Beginners.


How does selfish mining work?

A more comprehensive analysis of selfish mining can be found in the 2013 article Majority is not Enough: Bitcoin Mining is Vulnerable by researchers Ittay Eyal and Emin Gun Sirer. The thesis of the article is that, contrary to popular belief, the incentives for Bitcoin miners are flawed and could ultimately lead to the centralization of the network.

Let's demonstrate selfish mining using an example. Suppose the total hash rate is divided equally between four miners: Alice, Bob, Carol and Dan (each 25%). Alice, Bob and Carol follow the rules, but Dan is trying to game the system for his own benefit.

Under normal circumstances, the expectation is that the miner will find a block and add it to the chain immediately. And that's what Alice, Bob and Carol do as honest participants. But if Dan finds a block, he keeps it secret (it's a valid solution, but hasn't been added yet). Dan might get lucky and find two blocks in a row before the others.

Let's assume 100,000 blocks have been mined. So now we have Alice, Bob and Carol trying to propose block number 100,001. Dan finds it but keeps it secret. Now there are two chains, the public one and Dan's secret one (longer). While the others are still trying to find block 100,001, he finds block 100,002.

Dan's chain is now two blocks ahead. As long as his luck doesn't run out and he can stay ahead of the other chain, he continues. When the others catch up to him and are just one block away, he then reveals his chain.

Dan's chain, now public, is longer than the chain the other participants were working on. According to a rule we call the longest chain rule, the “correct” chain is the one that has accumulated the most Proof-of-Work (also called chainwork). In other words, if a node detects a chain with more accumulated work, it will select this chain, dedicating its mining power to the longest chain.

Now Alice, Bob and Carol can see Dan's chain – they now recognize this as the chain to follow. Any rewards they would have earned on the other chain will no longer exist. And because Dan mined the most current chain blocks, he keeps all the rewards.


Does selfish mining pose a threat to Bitcoin?

In fact, it would be cheaper for all participants to just behave according to the rules and expectations. Selfish mining generates a lot of waste, but it is worth remembering that those involved in the practice maintain a strategic advantage over other participants in the network. Therefore, it is likely that the malicious user is accompanied by other miners, which only makes the situation worse.

In their work, Eyal and Sirer cite this as a serious risk: over time, selfish mining can cause an increase in the hash rate of mining pools, as other users join selfish mining practitioners to maximize their profits. If a single pool is able to get most of the power, they could attempt a 51% attack.

Some do not consider this conduct a threat, citing ideological considerations on the part of miners and also the incentive to keep the network operating in a decentralized manner. A corrupted ecosystem would prevent miners from recovering their investments and generating profits.


Final considerations

If selfish mining can be successfully carried out by a consortium of miners, it could be an attractive strategy for amplifying profits. In the worst case scenario, the incentives will cause honest miners to join selfish miners, undermining Bitcoin's decentralization.

However, taking a broader perspective, it doesn't make much sense for participants to align themselves in this way. After all, harming network security can cause the price of Bitcoin to fall, which directly affects the profitability of mining operations.