Buying and holding Bitcoin (BTC) assets is not what allows people to gain power from the Bitcoin network.
Let's start with a simple fact: buying and holding bitcoin assets is not what gives people power over the bitcoin network. Holding Bitcoin simply means being able to benefit from the popularity and growth of the network (in terms of price appreciation), which provides users with features such as owning a scarce bearer asset that can be traded quickly and cheaply without The permission of any intermediary is required.
However, the security, integrity and evolution of the network depend on the coders, miners and thousands of individual nodes who keep track of the blockchain every day. In other words, rather than holding Bitcoin as a stock, you have a stake in the Bitcoin network itself, and most importantly, become a miner.
The implications of wielding global cyberpower should be obvious. Whether it is OPEC (Organization of the Petroleum Exporting Countries; Organization of Petroleum Exporting Countries), SWIFT (The global provider of secure financial messaging services; Society for Worldwide Interbank Financial Telecommunication), Strait of Hormuz (Strait of Hormuz) or Internet infrastructure, It is clear how well-positioned stakeholders can use their control over the network to exert influence. However, for Bitcoin, most of the power lies in the hash rate (Hash rate). This is what mining as a national security issue is all about.
National security is a term that is often used (or misused) to justify surveillance policies, military deployments, technology, or other law enforcement. In its most benign form, national security is a defensive stance aimed at ensuring the security, stability, and sovereignty of a given jurisdiction, a stepping stone to a more equitable global distribution of power and possibly peace.
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Power on the Bitcoin Network
A Bitcoin miner gains influence proportional to the computing power or work they put into the network. This is known as the hashrate, an overall calculation of computational work, more work means more impact.
However, it should be noted that the influence of these is very limited. Miners cannot create additional bitcoins, steal bitcoins, or change the underlying code. Rather, the rules of its blockchain network are what guarantee transactions actually go through and are incorporated into the blockchain.
Proof-of-work mining is integral to the functioning of the Bitcoin blockchain. All over the world, miners are looking for cheap energy to keep their mining machines running at maximum capacity at the lowest possible cost. The more hashrate miners are able to amass, the better their chances of winning the next block, for which they earn a mining reward of 6.25 newly minted bitcoins. The key here is to add their recorded versions of "true transactions" to the global bitcoin ledger.
In this system, a new record block is added to the blockchain about every ten minutes. When a block is verified and confirmed, the transaction will be permanently recorded on the chain. It should be emphasized that each node around the world needs to accept new blocks. If all the rules of the Bitcoin protocol are indeed followed, and no double consumption or manipulation occurs, the block will be automatically accepted.
The cost of trying to change Bitcoin's transaction records is very high. First of all, even if a certain miner or country has a large holding share in the global hash value, the overall holding probability determines that this does not guarantee winning every block. Bitcoin holders need to own Bitcoin Only 51% of the total circulation can have the right to change the transaction records on the Bitcoin blockchain. Second, if a corrupted transaction block does go through, but is rejected by a majority of nodes due to inconsistencies, any rewards associated with that block will be cancelled, thus attempting to tamper with Bitcoin's transaction records. It may make the miners lose more than they gain.
Still, the decentralized nature of Bitcoin makes it the most secure network in the world, but if a miner, or perhaps an enforcer representing a state, gets a majority of the hashrate (i.e. 51%), its security is compromised. severely affected. Technically, this would make it possible for the network to censor other miners and transactions, and similar forms of overreach.
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Game Theory in Practice
In 2019, Binance, the world's largest cryptocurrency exchange, suffered a hack, and $40 million worth of bitcoin was stolen from its vaults. The company’s CEO, Changpeng Zhao, then publicly floated the idea of “rolling back” the Bitcoin blockchain, which would restore the stolen funds to Binance’s custody (and reverse all transactions on the blockchain since the theft occurred. ).
To do this, the majority of bitcoin miners and node operators will need to be persuaded to follow his plan. The pushback from the Bitcoin community was immediate and no one tried to roll back. From the beginning, the consensus was against Binance, and the company had to absorb the losses and fix its internal systems. Imagine if geopolitics could be so direct.
Despite much emphasis on the "immutability" of the blockchain, the consensus within the industry is not always conservative. Everyone can try to make changes, just like the Ethereum community voted to fork the chain in 2016 to recover the $50 million in ether (ETH) stolen after the DAO attack.
Consensus is critical to the recovery of nascent blockchains, although a significant portion of the community rejects such intervention. The Ethereum network as we know it today, which is said to be in use by Microsoft (MSFT), JPMorgan Chase (JPM), Amazon (AMZN), and other corporate giants, has a market cap of over $300 billion, and that was the result of that rollback. Technically, it's a fork. Its predecessor, the original ethereum blockchain whose hack was not revoked and now known as Ethereum Classic, has a market capitalization of just over $3.5 billion.
Mechanisms that help ensure that the blockchain is hard to change are also very important when the network needs to be upgraded. The hashrate drives the integrity and change of the entire blockchain and represents an influence capable of enforcing norms and preventing abuse on the network, all of which require the consensus of token holders.
Currently, the US is the country with the most hashrate, a position earned after China forced miners within its borders to shut down. I think the more hashrate a country has, the more leverage the country has in protecting its interests. Have no doubts: Bitcoin is still held by Chinese investors and is still thriving.
For the sake of further discussion, imagine that the US has no miners and all the hash power is in Russia. That wouldn't bode well for bitcoin investors, or investors in U.S.-listed companies like MicroStrategy (MSTR) and Tesla (TSLA).
Likewise, what if none of Bitcoin’s hashrate power was in Russia, but dominated by the US and its allies? This would prevent Russia’s elite from storing their wealth in Bitcoin and hinder potential Russian efforts to use Bitcoin in global trade.
Of course, not all power is concentrated in the miners. Bitcoin is not easily weaponized or tampered with without the consent of a majority of individual nodes. However, if, for example, a country were to hack an exchange and plan to use the funds to carry out a devastating nuclear attack on the world, it is likely that even the most ardent supporters of freedom and financial institutions, staunch Bitcoin players Persuasion, in favor of intervention on the blockchain.
Also of interest here is how individuals can freely participate in this global consensus network. We can see a direct connection between logical inference and mining incentives, all the way from participating individuals scattered around the world to industrial-scale miners with the potential to become geopolitical components.
That is, miners residing in a common jurisdiction do not necessarily have the same values, nor should we assume agreement between miners and states. But we can foresee a group forming through the formation of associations (e.g. the Bitcoin Mining Council), state-sponsored mining facilities (e.g. El Salvador), or certain regulations that at least public mining companies must abide by. Ultimately, consensus is not about homogeneity, but about maintaining a balance of power, a balance that cuts across countries and viewpoints.
Unless the entire population decides to move away from Bitcoin, there is an incentive for each jurisdiction to gain in the global hashrate, just as domestic miners compete for the local hashrate. In Russia, this may be to mine new bitcoins to create local wealth, secure pipelines for trade, but also to protect the assets of its citizens, companies in which it invests, and possibly future state reserves.
For the US or the EU, it's not just about protecting their investors; it's really about preserving regulatory leverage. U.S. President Joe Biden's March 9 executive order called for a unified approach to cryptocurrency regulation in the U.S., which could affect the traditional financial system and find ease in the applications surrounding cryptocurrencies. method of implementation. We saw this clearly recently when two US-based projects, Ethereum wallet MetaMask and Non-fungible Token (NFT) platform OpenSea, unilaterally blocked Iranian and Venezuelan users from using their services .
However, unlike these apps and most cryptocurrencies, Bitcoin has no CEO or headquarters, it is an open and decentralized network. Therefore, any attempt at regulation at the protocol level or around security will require hashrate rights in the relevant jurisdiction. Without hash power, there is no voice.
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Towards Geopolitical Balance
An important aspect of this argument is the realization that Bitcoin's share of the global financial system is growing rapidly. It may seem trivial today, but the global adoption of this asset, Bitcoin, continues to unfold at a faster pace, even faster than the growth of the Internet witnessed in the late nineties.
We know the reasons why individuals and companies may want to save with Bitcoin or keep that asset on their balance sheet. Especially in the past two years, we have seen more ordinary people, billionaires, corporations, hedge funds, and even countries become very, if not fully embracing, very enthusiastic about Bitcoin.
It should become increasingly clear to us why this next phase of blockchain network and asset class growth is likely to include a scramble for hashrate, while investors and regulators realize that participation in the functioning of the network itself is in the long-term public interest best way.
Not only does Bitcoin provide an investable asset, holders benefit from its scarce supply and immunity from arbitrary policymaking and money printing. More broadly, it provides a global network for the settlement of the Internet's native currency, which is not controlled by any single entity. It provides an alternative base layer for the development of a fairer global financial system that is borderless and democratic by design. It constitutes the disarmament of finance while still allowing the ethical imperatives of the bottom line to have an impact on consensus and enforcement.
about the author
about the author
Ben Caselin is Head of Research and Strategy at the AAX cryptocurrency exchange. AAX is the world's first cryptocurrency exchange driven by the London Stock Exchange's LSEG technology. It is also the first exchange based on the Satoshi standard, and is committed to promoting the popularization of Bitcoin.
