On this week’s episode of The Crypto Mile, our host Brian McGleenon spoke with Jameson Lopp, a Bitcoin expert and co-founder of the digital asset security firm, Casa. The conversation centred on the longstanding concerns about the concentration of Bitcoin’s mining hashrate within China. The hashrate is a measure of the amount of computational power that Bitcoin miners are utilising to process transactions and safeguard the network. A higher hashrate value signifies more processor chips are being used to mine new bitcoin and verify transactions on the network. Lopp discussed the potential risk of a “51% attack” if China gained control of over half the global mining power. He discussed the possibility of the Chinese government launching such an attack, which could effectively shut-down the Bitcoin network.
Video Transcript
BRIAN MCGLEENON: Today on “The Crypto Mile,” I am joined by Jameson Lopp, respected Bitcoin expert and co-founder of Bitcoin security firm, Casa. Today we’re going to chat about the significant concentration of Bitcoin mining output within China, and the possibility of a 51% attack on the Bitcoin network emerging from the country. Imagine someone going into a bank and having the power to rewrite whatever figures they wanted in to everyone’s bank account. Jameson, welcome to this week’s episode of “The Crypto Mile.”
JAMESON LOPP: Glad to be here.
BRIAN MCGLEENON: So Jameson, can you explain to us the present situation for Bitcoin and crypto within China? I thought using Bitcoin and Bitcoin mining were both banned in the country, but that may not be so.
JAMESON LOPP: The general sentiment and agreement seems to be that participating in exchange and trade activities around Bitcoin and crypto seems to be banned. Mining also seems to be banned. The last I heard and my understanding is that it is not outright illegal to actually own Bitcoin, but most of the activities around Bitcoin are considered to be illegal.
BRIAN MCGLEENON: OK, so if we’re talking about Bitcoin mining, that has a connection with the hash rate, and the hash rate is the amount of calculations that go into keeping the consensus mechanism of the blockchain intact. And if the hash power goes up that means more miners are mining to try and acquire new Bitcoin to put onto the network. What is the market share of hash rate that China has at this moment in time?
JAMESON LOPP: Right. It’s been all over the place. If I recall correctly, I think it peaked in 2019, and there was around 75% of global hash rate in China. Now, in 2021, that’s when we saw the biggest crackdowns and I think the harshest proclamations by government entities basically saying, you know, you need to stop doing this.
And 2021, that summer was actually very interesting because over the span of a few weeks, the total hash rate of the Bitcoin network actually got cut in half. And over the next 6 months, the latter half of 2021, we saw that hash rate come completely back online. And what it seemed to be happening was that a large portion of those miners that were operating in China basically turned off their machines, moved them to other more friendly jurisdictions, turned them back on.
Last I checked at the moment, the United States seems to be doing pretty well. I think probably has around 40% of the global hash rate mainly as a result of our more friendly jurisdictions and having a lot of cheap energy in places like Texas and the Northwest with a lot of hydropower.
BRIAN MCGLEENON: Should we be concerned that China has such– has this kind of majority of the hash rate?
JAMESON LOPP: Pretty much all of the silicon manufacturing, the actual chips that are used in miners are produced in China. So while, you know, China currently doesn’t have an overwhelming hash rate, if something changes and it becomes, you know, slightly more friendly again for miners in China, it would not be at all difficult for the hash rate in China to reach new highs.
And that’s just because they have that direct supply. And when it comes to mining, time is money. If you have to ship your hardware to other countries, you know, every day those machines are in transit, you’re essentially losing potential profit. Could China come back and be a dominant force? Sure. But I think for the same reasons that we haven’t seen any aberrant activity on the network, even when China had a super majority of hash rate is the same reasons why we wouldn’t have to worry about that in the future.
And it really comes down to incentives. And that really is know why would miners attack the network? That would cause, you know, massive undermining of confidence in the network and it would probably greatly reduce the current value of the Bitcoin holdings of those miners who tend to hold a lot of Bitcoin and also, of course, effect the future potential profits of it.
BRIAN MCGLEENON: It would be very difficult because of that decentralized nature that you spoke about for the Chinese government to kind of seize mining operators across the country. But let’s dive into the potential of the 51% attack. Can you kind of explain the possibility and the severity of such an attack on the network, and what does a 51% attack mean?
JAMESON LOPP: It basically means that if you have even slightest majority of global network hash rate, then you really get to decide which blocks are added to the blockchain. Now, you don’t get to decide arbitrarily what the rules of the protocol are. You still have to follow the rules of the Bitcoin protocol. Otherwise, the tens of thousands of validating nodes around the world will simply reject whatever block that you put out on the network.
But it does mean that you can do a few things that would be extremely annoying. You could, you know, consider it like a denial of service attack. From an incentives perspective, if it was sort of a profit motivated 51% attack, then generally what you would want to do is re-spend your own money.
You know, you can’t spend other people’s money, you can’t create money out of thin air that the protocol doesn’t allow, but what you can do is you can send a transaction, get something in return, and then you can basically roll back that block. You can kind of undo the transaction history and make it as if that transaction never happened, therefore getting your money back into your wallet and then being able to spend it elsewhere.
Now, the other thing that you could do is simply not allow any transactions to go through, or you could say only whitelisted transactions that I approve of can go through. And so you know, that’s what you would probably expect from a more authoritarian nation state attack, where they probably are not as motivated from a profit perspective, but they just want to try to kill the network and make it unusable.
BRIAN MCGLEENON: So like looking at Bitcoin at the moment, there’s been a lot of institutional interest. We’ve got the different spot Bitcoin ETF filings. Do you see the institutional interest as a good thing or a bad thing when it comes to crypto and just decentralization, and I suppose the tenants of Satoshi’s Whitepaper, in general?
JAMESON LOPP: The vast majority of wealth in the traditional financial system is pretty concentrated, and it’s generally in the hands of the institutions that seem to be making a play for these ETFs and trying to grab market share from this new financial industry. So you know, I would expect that the result of this, you know, sure, it will help, you know, mainstream this sector of the economy, but it will also result in the ownership wealth and potentially power dynamics becoming more centralized.
So this is something that I’ve been fighting against for the past eight years now. Trying to promote self-custody with individuals holding their own keys is that it’s quite clear to me the convenience of letting a trusted third-party like a financial institution hold your money for you, for most people that outweighs the idea of being able to manage your own assets and, of course, all of the responsibility that comes along with that.
So I’ve just been– I’ve been trying to increase the convenience factor for people to be able to hold their own keys, to be sovereign. You know, take advantage of the unique attributes of these systems that I expect most people will throw out the window, either because they just don’t understand them or because it’s not presented to them as an option because the incentives are not really there for these large financial institutions to promote people to hold their own money and to not use the institution itself.
BRIAN MCGLEENON: I suppose we’re conditioned to trust custodians to look after our wealth. Is there not a liquidity concern here if we’re going to use Bitcoin as an equivalent to fiat currencies?
JAMESON LOPP: Yeah, it’s kind of the question of, you know, will Bitcoin ever get to the point where it’s actually usable as a unit of account? And that’s, you know, a big open question. You know, myself as a technologist, I’ve said for a long time that price stability or lack of volatility or whatever, that is not even a goal of the Bitcoin protocol. It has no knowledge of its own value. It is a, you know, fully self-contained system. And the value that we ascribe to it is, of course, happening on markets and in other places, where we’re tying Bitcoin to other assets and trading them.
So I think a lot of people would say if it becomes big enough, it will become stable. There will never be any guarantee of stability, and the really tricky thing and I think what people– some people are starting to realize over the past few years is there really is no such thing as stability. You know, every asset, every currency, the value of everything is relative to everything else. And there’s so many different variables at play that I think even the idea that you can, quote-unquote, “stabilize” the value of anything is pretty ridiculous.
BRIAN MCGLEENON: I suppose we have a precedent anyway we can go back to, and that was the gold standard. But looking at Bitcoin, is it truly decentralized or, you know, considering that the amount of hash power is controlled by such a small group of mining operators worldwide, can we really say that that’s a decentralized network?
JAMESON LOPP: Decentralization can be measured in many different ways. As I mentioned earlier, there are tens of thousands of nodes that are validating, essentially auditing the protocol, the blockchain, making sure that everybody is following the rules. They in a sense counterbalance the miners to make sure that the miners are following the rules.
It is distributing the power so that no one has control over the network. You know, this is the problem with the fiat system with a lot of traditional hierarchical-based systems is that power concentrates at the top. You know, we literally create these pyramid-type structures, but that just doesn’t apply to Bitcoin. It’s actually this system of anarchy, where there are rules, but there are no set rulers.
And it’s trying to understand the power balance and how things can change or, you know, who can stop who from doing what turns into a really lengthy discussion that we actually spent many years arguing about during the scaling wars. All that we really know is that Bitcoin seems to be decentralized enough for the current state of the world and the various powers that would like for it to cease to exist.
And we can never really know for sure if it is decentralized enough to withstand the next level of attack. We should expect that attacks will continue to happen, especially, you know, if this ecosystem continues to go more mainstream and threatens more of the authorities around the world. And as those attacks come in, those of us like myself who are paying attention and who care and who want to protect the system will come together and discuss, you know, what needs to be done to try to fight against this attack.
BRIAN MCGLEENON: Well, Jameson, thanks very much for coming on this week’s episode of “The Crypto Mile.” It’s been great talking to you.
JAMESON LOPP: Thanks for having me.
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