Selfish Mining Explained

Understanding Bitcoin's Incentive Mechanism

Bitcoin's incentive mechanism is viewed as a fair game. Ensuring that participants receive relatively equitable rewards in a decentralized ecosystem is key to the long-term stability of the network. Financial incentives drive nodes to maintain network security—honest nodes are rewarded, while dishonest ones lose out.

This mechanism is especially evident in cryptocurrency mining. Various parties invest heavily in hardware and electricity, hoping to recoup their investments and achieve profitability through newly added blocks. The simplest way for miners to maximize their returns is to follow the rules.

Once a new block is added on-chain, miners receive all transaction fees from that block along with a portion of newly minted tokens, known as the block reward. The number of tokens awarded halves approximately every 210,000 blocks (about every four years). Currently, the reward is 12.5 BTC, which will decrease to 6.25 BTC in a few months.

This financial incentive mechanism intensifies competition, ultimately enhancing the network's security and decentralization. However, some speculate that these incentives could be manipulated. Next, we will discuss the concept of selfish mining.

How Does Selfish Mining Work?

As early as 2013, researchers Ittay Eyal and Emin Gun Sirer explored the concept of selfish mining in their paper, "A Simple Majority Is Not Enough? Bitcoin Mining Is Vulnerable." Contrary to popular belief, this paper pointed out that Bitcoin's mining incentive mechanism has flaws that could lead to centralization of the network.

Let’s explain selfish mining with a specific example. Assume that the hash rate is evenly distributed among Alice, Bob, Carol, and Dan, with each holding 25%. While Alice, Bob, and Carol follow the rules, Dan attempts to profit from the entire system.

Normally, newly mined blocks are immediately added to the blockchain, as Alice, Bob, and Carol do. However, after Dan mines a new block, he does not immediately publish it; instead, he continues to mine two additional blocks.

Assuming there are currently 100,000 blocks, Alice, Bob, and Carol are competing to mine block number 100,001. At this point, Dan finds a new block but does not publish it. This creates a public chain and Dan's private chain (which is longer). While others are mining block 100,001, Dan has already mined block 100,002.

As a result, Dan's private chain is two blocks ahead of the others. If luck continues to favor him, his private chain will consistently be two blocks longer than the others. When others are only one block away, Dan can then reveal his private chain.

At this moment, the private chain Dan publishes is longer than the others. According to the longest chain rule, we choose the chain that has accumulated the most proof-of-work (PoW). If nodes detect that one chain has more accumulated work, they will switch to that chain and provide hash power to it.

Alice, Bob, and Carol then realize that Dan's private chain is the one that needs to be followed. The rewards they earned on the other chain become void, while Dan receives all rewards for the blocks he mined on the revealed chain.

Does Selfish Mining Pose a Threat to Bitcoin?

In this scenario, if participants act as expected, the rewards they receive will indeed decrease. Additionally, selfish mining is extremely wasteful of resources. However, those attempting to engage in this behavior may have a strategic advantage over other network participants, potentially leading some miners to follow the attacker, worsening the situation.

In their paper, Eyal and Sirer noted that parties in the network might collaborate with selfish entities to maximize their gains, which would gradually increase the hash rate of mining pools, ultimately evolving into a significant risk. If a mining pool occupies a majority of the hash power, it could launch a 51% attack.

However, many believe that this behavior does not constitute a genuine threat because miners consider ideological factors, and the reward mechanism can maintain the network's decentralization. If the ecosystem is severely compromised, miners' investments in power and equipment would be at risk, making profitability unrealistic.

Conclusion

If a coalition of miners successfully implements selfish mining, it could indeed create substantial rewards for participants. The worst-case scenario is that this incentive model might lure honest miners into participating in selfish mining, thereby seriously threatening Bitcoin's decentralization.

However, from a broader perspective, the practice of collaborating in this way holds little real significance. Severe damage to the network would lead to a decline in Bitcoin prices, directly undermining the profitability of mining activities.

Risk Warning

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