Bitcoin Risk Analysis

The Bitcoin network was launched in 2009 by the mysterious Satoshi Nakamoto, a developer who worked extensively on the project but only interacted with people on developer forums. At the end of 2010, Nakamoto disappeared from view, announcing his departure and handing off the project to the open source community. No one knows his (or her) true identity, but what is known is Nakamoto's wealth. He is said to have more than $100m worth of bitcoins by today's value, and hasn't spent any of it.

The Bitcoin cryptocurrency records its transactions in a public log called the blockchain. Its security rests critically on the distributed protocol that maintains the blockchain, run by participants called miners. Bitcoin's decentralized financial network is not immune to attack. It has already been subject to attacks on numerous occasions, and is in danger of experiencing more. Conventional wisdom asserts that the mining protocol is incentive-compatible and secure against colluding minority groups, that is, it incentivizes miners to follow the protocol as prescribed.

We show that the Bitcoin mining protocol is not incentive-compatible. We present an attack with which colluding miners obtain revenue larger than their fair share. This attack can have significant consequences for Bitcoin: Rational miners will prefer to join the selfish miners, and the colluding group will increase in size until it becomes a majority. At this point, the Bitcoin system ceases to be a decentralized currency.

While the concept behind the crypto-currency is designed to minimize interference, both researchers and criminals have found ways to subvert it. we explores some of the vulnerabilities surrounding this alternative to conventional fiat currency, and describes some of the changes being made to ensure it remains secure and stable.

References:
andes: Bitcoin’s kryptonite: the 51% attack, June 2011. https://bitcointalk.org/index.php?topic=12435