The notion of a bitcoin mining death spiral has circulated through crypto circles for quite some time. The premise goes like this: a wave of miners stops operations when they can no longer turn a prof
The notion of a bitcoin mining death spiral has circulated through crypto circles for quite some time. The premise goes like this: a wave of miners stops operations when they can no longer turn a profit. According to Bitcoin's design, that exodus would slow the network to a crawl. The system would lose its credibility. People would dump coins. The price would sink. More miners would leave. The downward spiral would accelerate on itself, potentially reaching zero. Multiple problems undermine this theory, explored in detail last month. But the most striking aspect of the death spiral narrative was its origins. Bitcoin Cash advocates, several months after the fork, used this exact argument to claim that BCH would siphon so much mining activity from Bitcoin that the death spiral would finally become real. It did not. The same danger now faces Bitcoin Cash from a different angle. A mining crisis could emerge for BCH in 2019 that stems not from drawing hashpower away from Bitcoin, but from being too weak to defend itself.
Charlie Lee, creator of Litecoin, took up the subject of 51% attacks last month during an appearance on Laura Shin's Unconfirmed podcast. His comments came after double-spends occurred on the Ethereum Classic network. The core of his argument centers on a structural weakness: when multiple blockchains use the same mining algorithm, the smaller ones become vulnerable. Crypto networks select a specific algorithm for mining. ASIC rigs are engineered for these algorithms, not for specific coins. Hardware works across all chains that employ the same algorithm. Size disparity creates the risk. Ethereum and Ethereum Classic both employ the same hashing algorithm. Ethereum Classic generates only around 5% of the computing power that Ethereum does, according to BitInfoCharts. The danger this creates became evident.
"You need to be the largest network on your hashing algorithm," Lee said during his conversation with Shin. "If you're the dominant coin, miners won't attack you because they need you to stay alive and keep generating revenue. If someone owned 51% of all Scrypt mining rigs and used them to kill Litecoin, they'd have killed their only source of income since Scrypt equipment cannot profitably mine much else."
He elaborated on how Ethereum miners can attack Ethereum Classic without the same consequences. "The Ethereum miners who run a 51% attack on Ethereum Classic can still return to the Ethereum network after the attack," Lee noted. "They fall back on the dominant chain. It's a side option for them."
This logic breaks what Nakamoto Consensus assumes. "The whole idea behind Nakamoto Consensus is that miners will not want to attack the coin because it would destroy their investment," Lee added. "They make far more by mining honestly. But when your coin represents 5% or 2% of the total hashrate on an algorithm, and you can easily rent hashpower, the incentive structure flips. Then attacking becomes profitable."
Bitcoin Cash occupies precisely this weak position. Both Bitcoin and Bitcoin Cash use SHA-256. Bitcoin Cash's network generates less than 4% the hashrate of Bitcoin. This disparity exceeds what we see with Ethereum and Ethereum Classic. Bitcoin Cash also trails behind Namecoin and Unobtanium, both much smaller networks that boost their security through merged mining.
The death spiral scenario for Bitcoin Cash would unfold like this: people begin to see the network lacks sufficient security to prevent double-spends. Confidence erodes. The price drops. Miners see diminished revenue and depart. The hashrate falls. The price falls further. Each event reinforces the next, a cascade with no obvious stopping point. The precedent exists. GBMiners, a mining operation run by Amit Bhardwaj, once controlled about 5% of Bitcoin's hashrate. Bhardwaj was arrested last year for operating a Ponzi scheme. Five percent of Bitcoin's current hashrate would supply more than enough power to mount a 51% attack on Bitcoin Cash. What would someone controlling that much power choose to do with it?
The death spiral idea faces some legitimate objections. Previous 51% attacks have not inflicted massive economic damage to their targets. Ethereum Classic survives in the top 20 cryptocurrencies by market cap as ranked by Messari's OnChainFX. Bitcoin Cash hosts miners motivated by ideology, not only by profit margins. Some miners accepted operating at a loss during the November conflict with Bitcoin SV backers. Bitcoin ABC, the main software client for Bitcoin Cash, released an update containing checkpoint technology in November. These checkpoints prevent the sort of large chain reorganizations that struck Ethereum Classic. However, BitMEX Research indicated uncertainty about whether this change actually helps Bitcoin Cash's security. Acquiring hashpower for an attack on a SHA-256 network also takes more work than it does for smaller coins. Ethereum Classic's hashpower can be rented through services like Nicehash. That option does not exist for Bitcoin Cash. The practical barriers to attack are steeper.
The underlying vulnerability persists regardless. Bitcoin's stranglehold on SHA-256 hashpower means Bitcoin Cash security remains fundamentally suspect. A mining death spiral may not develop throughout 2019, but the conditions for one are undeniably present.
