Tuesday 29 December 2015

Who benefits from catastrophic consensus failure?


Catastrophic consensus failure is when a blockchain hard fork occurs but mining continues on the original chain.Because the change to the protocol causing the hardfork isn't recognized by clients on the original chain, it doesn't matter if the original chain has less hashing activity than the hard fork (big blocks) side. It can keep on being mined indefinitely.The reason miners would continue mining the original chain is because there are buyers for their newly mined bitcoins. This situation might last only for a short period of time before the market concludes that one side or the other will be the sole survivor, or this situation may persist indefinitely if the market is OK with that outcome.So, for at least a period of time there will be this situation where there is a market for post-fork bitcoins generated on the original chain and also a market for the post-fork coins generated on the the side with the change to the protocol (e.g., with the big blocks). Of course, these two will have different exchange rates.Now, what happens is that there are some who will benefit from this situation (of there being a market for coins on each side of the hard fork).For instance, let's consider custodial wallet services and exchanges. They hold customer balances from deposits that were made prior to the hard fork. What happens after the fork? Do these services simply conclude that the "hard fork", being the longest chain, is what they now solely use? If so, customers get shortchanged since they had deposited pre-fork bitcoins that can be spent independently on both chains but now they get to sell or withdraw only on the hard fork side. The custodial wallet service though is the party that holds the pre-fork coins and can trade them (after tainting them) on the original chain for their own financial gain.So any custodial wallet service (Coinapult, Circle, Coinbase, etc.) and exchange (BItSTAMP, OKCoin, BTC China, Kraken, itBit, etc.) definitely benefits from catastrophic consensus failure.Are there any others that do benefit from this situation?Well, there's the potential scenario where hashing capacity returns to mining the original chain and that side regains "longest chain" status. This causes a block reorg and the hard fork side disappears as if it had never happened -- confirmed transactions and all.In that scenario, there are many, many who benefit. For instance, a speculator who was short could have taken pre-fork coins, tainted them with newly mined coin from the fork, and used that to cover the short. After the block reorg, this speculator would still have the bitcoins that will confirm in transactions on the original chain. Borrowers also have this opportunity to repay with tainted coin, then still retain those bitcoins that will confirm in transactions on the original chain.Certainly there are others that benefit from catastrophic consensus failure. What are some more of these? via /r/Bitcoin http://bit.ly/1Pw1aMO

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