[cryptography] Bitcoin observation

Jon Callas jon at callas.org
Thu Jul 7 17:43:16 EDT 2011


On Jul 5, 2011, at 10:53 PM, Alfonso De Gregorio wrote:

> Let's assume there is a way to convince market participants that some Bitcoins has been destroyed, what would happen then? The value of the current Bitcoin supply would slightly increase, that's correct.
> 
> Would market participants be willing to invest more in order to secure their liquid assets against Bitcoin assassination attacks? How the attack rate would increase/decrease?
> 
> The tragedy of the commons suggests us that when both risks and benefits are socialized between the elements of the population, individuals lack the incentive to unilaterally invest in security.
> 
> On the other hand, as long as the reduction of money supply increases the value of the survived assets (ie, there's demand), some elements of the population will have an incentive to attack.
> 
> It would be interesting to investigate further.

Some of market participants would certainly be willing to do that.

Consider a participant who is also a payment processor, similar to a credit card, etc. They're a financial institution, so they're certainly interested in assets and commodities, but they also receive money on normal transactions and do not get this when bitcoins are directly transferred. (Obviously, they could bill transactions in bitcoins just as easily as dollars or euros or sterling, too.)

Assume they get 2% of a transaction. This means that (hand wave) their Highlander Function is proportional to 50. In other words, if assassinating a bitcoin causes 50 transactions to move to traditional currencies, then the cost of killing it is zero.

Also obviously, if they just start collecting bitcoins themselves, they can take them out of circulation, which as we've all noted, may be equivalent to destroying them.

But this institution also profits by instability. If the price of a bitcoin fluctuates wildly, then they are less attractive as a currency to small holders.

For example, let's assume 5% wild fluctuation. I'll put this in mathematical terms as saying that if its nominal price is 100, then the actual price is a random function between 95 and 105. If I am a receiver of bitcoins, I deal with this simply. I just say that the value of a bitcoin is 95. I push the cost of fluctuation to the payer. I'm not interested in anything else -- after all, I have the supply and if the supply is of something that is attractive for you to use a bitcoin for, I just make you eat the fluctuation. Note that the manipulator can also use the fluctuation as a lever to get bitcoins cheaper. They keep querying the price of a bitcoin and buy it if it's (e.g.) 98 or less, thus getting 2% profit on them.

If the fluctuation creator can induce more fluctuation, it's even better. It's even to their benefit if the fluctuation is lopsided -- e.g. 90% of the time the value is 110, but 10% of the time the value is 50. Pump and dumps can get this behavior. 

If this manipulation causes people to flee bitcoins, they win because they get people to use normal credit cards again. If they fail, and despite all this, bitcoins are still a valuable currency, they win again. They have a lot of a valuable currency.

Note that I've been sketching this attack assuming that it's Just Business. If there's genuine animus against the currency by which I mean they just want it to fail and don't care about cost, then all these are accentuated.

There's an old security maxim that it's easy to make a system that you can't break yourself, but it's hard to make one that other people can't break. This is especially true when the attacker has motivations you don't know or understand.

A government, for example, could turn a blind eye to people manipulating the market. Easy and passive and there's no fingerprints. They could set up private deals so that they pay a bounty over the market price of bitcoins (and make that be a moving average to encourage fluctuation) and let the financials take care of it. They could set up their own hacking networks to steal or destroy bitcoins.

It is my intuition that nation states of all stripes aren't going to like them. Some set of them would be happy to let the banks and speculators take care of it. Some of them would engage in actual hacking to hurt the currency, and the interesting property that destroying a bitcoin is a worthwhile attack makes it even more interesting. 

What if the Western governments gave Lulzsec letters of marque and told them they'd pay them by the lul? This would make a great movie plot. The merry hackers get caught and then turned loose on the (according to that plot) bad guys.

	Jon




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