The recent achievement of Ghash.io, the largest Bitcoin mining pool, in attaining 51% hashing power has elicited a huge emotional response from the Bitcoin community. It produced a brief sell-off, which played a minor roll in a recent fall in the Bitcoin price. Why was the Bitcoin community so afraid of this development? They were afraid of a 51% attack. Since Ghash.io attained 51% hashing power, an attacker, or a person on the inside, could have gained control of the mining pool, and used that hashing power to execute a double spend. Many people are terrified of this possibility, saying that the mere potential for it to happen marks the fatal flaw in Bitcoin.
Implications of a 51% Attack on Bitcoin Price
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If a 51% attack happened, they say, then the Bitcoin price would slam into the ground, all businesses would abandon their efforts at Bitcoin acceptance, and the currency would be effectively dead. Additionally, these people claimed that Bitcoin mining pool centralization destroys the trustless nature of Bitcoin. If a Bitcoin mining pool acquires 51% hashing power, everyone will have to trust that the pool will approve all transactions indiscriminately. Now, it is far from certain whether or not a 51% attack would actually produce these kinds of effects. Regardless, the fear produced very real effects on the Bitcoin price and in the hearts and minds of the Bitcoin community.
Many people boldly asserted that this problem with Bitcoin mining marked a failure of the free market; if people act in their self interest, then the economy will inevitably fail and everyone will be poor. Those claims could not be farther from the truth. In reality, the market is fixing the problem of Bitcoin mining pool centralization, and no one even realizes it. The efforts put forth by the community to come up with a solution prove that Bitcoin remains trustless, and that the market will prevail.
The Reality of the Bitcoin Market
The fundamental concept that those who are afraid of Bitcoin losing its trustless, decentralized nature fail to grasp is the fact that the free market itself is trustless. Voluntary transactions in the money economy do not require trust between the parties involved in trade. Actors who make unsavory or inefficient choices, and entrepreneurs who produce unsatisfactory products, are punished by the market in that consumers stop sending money to those people. A market does not need trust in order to operate, an individual does not even have to know another person in order to peacefully trade with them. The same is true for Bitcoin mining.
There is no trust involved when a Bitcoin mining pool reaches 51% hashing power because the market immediately reacts and moves to remove that power from the overgrown Bitcoin mining pool. The Bitcoin mining community will likely never reach a state where Bitcoin users have to trust a Bitcoin mining pool to benevolently dominate the market. When we saw Ghash.io beginning to approach 51% hashing power, the community immediately took action. Miners left Ghash.io and went to other pools and individuals fired up their old, obsolete Bitcoin mining rigs and pointed them at the competing Bitcoin mining pools in order to remove hashing power from Ghash.io. The people condemning Bitcoin as a failure because of this Ghash.io debacle, while asserting that action for the sake of pursuing self-interest leads to the ultimate destruction of the market, prove themselves wrong in their very actions. In employing any means available to remove hashing power from Ghash.io, these people were very much acting in their own self interest– and out of distrust for the increasingly centralized Bitcoin mining pool. The preservation of a decentralized Bitcoin market was in their self-interest, so the acted to preserve that decentralized monetary system.
Free Market Solutions to Bitcoin Mining Centralization
So, how could these pessimists possibly claim that the very existence of this problem in the Bitcoin mining community is caused by miners acting in their self interest without realizing the absurdity and self-contradiction in their statements? In actively pursuing their self-interests, the terrified members of the Bitcoin community worked to create a temporary fix to this Bitcoin mining problem and preserve the bullish trend of the Bitcoin price. Moreover, these same people correctly suggested that steps needed to be taken to construct a permanent solution to this problem with Bitcoin mining. Almost immediately, people began advertising and encouraging miners to use p2pool, a decentralized Bitcoin mining pool where the hashing power of the mining pool is not placed in the control of a central authority or entity. Also, the community began theorizing ways in which the Bitcoin Core can be updated and modified to fix the Bitcoin mining problem. Yet, the market has failed, self-interest has destroyed Bitcoin forever!
Claims that the failure of a single project on a free market indicates the failure of the free market as a whole are spurious at best. The fact that the people making these claims are currently pursuing long term solutions to the Bitcoin mining centralization problem is an affirmation of the efficacy of the free market. They fail to realize that markets extends far beyond the monetary aspect and the actual operations of the blockchain technology. Because of this, they see a problem arise in the financial or technical spheres of the Bitcoin community and view it as a failure of the market as a whole. In reality, all human action constitutes the parameters of the market. Every action taken to solve problems and avoid disasters, to analyze proposed solutions to these problems, and even to fraternize and bond with the community makes up the market. Communication between individuals is just as much of an economic transaction as buying and selling.
The constant efforts of the Bitcoin community to expand the crypto-currency’s acceptance, or to solve a problem with the technology itself, is a function of the market, just as the fluctuation of the Bitcoin price is a market function. Rather than lamenting the failure of the market, the people who are terrified of Ghash.io would do better to celebrate the success of the market, as they were all able to collaborate with each other to start producing solutions to this Bitcoin mining problem. The free market does not guarantee, or even promise, perfection and flawless fluidity, it merely guarantees an unhindered problem solving process and voluntary cooperation. That is precisely what we saw happening in the recent Ghash.io debacle; powerful problem solving and social cooperation. The problem is, of course, far from being completely solved, but the Bitcoin community has established a very strong starting point from which they can further develop their solutions. This starting point, and all of the brilliant solutions that are bound to spring from it, are all thanks to the individuals acting on the free market…and of course thanks to Ghash.io.