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Recently, Princeton and Florida International University came out with a study titled “The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin.”
The authors set out to explore “how China threatens the security, stability, and viability of Bitcoin through its dominant position in the Bitcoin ecosystem, political and economic control over domestic activity, and control over its domestic Internet infrastructure.” In effect, China has had a disproportionate amount of power of Bitcoin and the vague legal situation regarding cryptocurrencies in the country puts Bitcoin in some hot water. And, as the paper discusses, it is already beginning to exert its power over Bitcoin in a number of ways
“As the value and economic utility of Bitcoin have grown, so has the incentive to attack it,” the report points out. A real problem for the future, there are a few reasons to consider China as Bitcoin’s most powerful potential adversary despite also being a hub for blockchain-related developments in the past year.
China’s Influence Over Bitcoin
The paper makes the case that Bitcoin has become heavily centralized on account of the distribution of its mining pools. Currently, 80% of all the Bitcoin mined is performed by 6 mining pools. Five of these mining pools are owned by individuals or companies based in China which goes to show how much influence the country has over Bitcoin’s supply and distribution.
Frankly, the main concern is a 51-percent attack on cryptocurrencies and Bitcoin remains susceptible to this attack. If we consider the fact that if these mining pools were to ‘team up’ to disrupt the network, they could easily conduct a 51-percent attack because they collectively account for 74 percent of Bitcoin’s hash power.
Thus, China’s control over Bitcoin through its mining pools creates a real risk for the longevity of the network. This is the first way China is able to effectively control Bitcoin at its most vulnerable: using the fundamentals of its proof-of-work network itself.
However, secondly, China also has the ability to slow Bitcoin down. Currently, China’s Great Firewall adds latency for miners operating outside of Chinese borders. What this means is oftentimes Bitcoin mining pools owned by China sometimes mine empty blocks purely because of China’s state firewall. Looking at the data, Chinese mining pools seem to mine a disproportionate amount of empty blocks which slows the entire network down; the entire network becomes less efficient.
Therefore, not only does China have the potential to seriously disrupt Bitcoin’s network via its mining pools, but it can also strangle the network’s speed and efficiency by establishing roadblocks to access and putting further costs on Bitcoin miners. As the report shows, much of this has already been happening: Chinese mining pools already mine empty, inefficient blocks at higher rates than the world historical average.
Does China See Bitcoin As a Threat?
So far, there has been much speculation as to if China can even pull off an attack of Bitcoin or if the country has enough influence to effectively “shut it down.” Although it seems possible, we must also ask ourselves: why would China ever do such a thing?
The research paper speculates on Bitcoin’s inherent “ideological opposition” to the Chinese system since it cannot be effectively controlled or tampered with. However, more concretely, China could see as its interest to make the young digital currency a weapon against other nations. Bitcoin, if it grows more powerful, could effectively be used to destabilize other world currencies. For example, if delegitimizing Bitcoin or slowing down its network could cause foreign consequences that could benefit the Chinese state, such a possibility would always be in the cards.
These are all conclusions that the research paper found, but they are rooted in real fears about our multipolar, international future. For those that see the longevity of Bitcoin as a currency, and hope to even someday see it as a world currency, they have to reckon with the fact that China currently holds a disproportionate amount of power over the network. And this power could easily be weaponized for purposes that would be destructive to Bitcoin’s long term prospects as a stable network.
The recently released Princeton paper forces us to consider China in the long-view of Bitcoin’s future. All things considered, it seems that currently Bitcoin’s future looks to be in China’s hands.