A Secure, Attack-Resistant Money

The mining process makes double-spending or reversing transactions extraordinarily difficult and expensive. The system therefore achieves a high level of “immutability,” and such immutability is what makes Bitcoin such good money. Remember that money is a ledger, which is a record of who owns what amount of the money. Historically, a lot of the ways that money has gone wrong have involved altering the ledger. Thefts (someone illegitimately moving money from your ledger account to theirs), account freezes (someone freezing the balance of your ledger account so you can’t use it), and government printing too much money (adding too much to its own ledger account out of thin air and thereby diluting the purchasing power of everyone else’s) are all examples of harmful attacks on the monetary ledger. Ledger immutability, except when the money holder consents to a transaction, is fundamental to good money.

The first way mining achieves ledger immutability is the fact that anyone can join the effort to provide network security by mining. Any centralized authority attempting to hijack the system can therefore be counteracted by new participants joining the system. The second way immutability is achieved is through the proof of work mechanism described earlier. The difficulty of proof of work means that miners must purchase specialized computer hardware known as an ASIC (Application-Specific Integrated Circuit). Such hardware is optimized to mine for the Bitcoin network but is useless for anything else. This means that any attacker has to either purchase or co-opt specialized equipment in order to attack the network, and such an investment cannot be recouped or recycled since it is only useful for Bitcoin mining. This expense provides a huge deterrent to attacking the network.

The third way mining achieves immutability is that even if an attacker can marshal enough resources to acquire a large portion of the world’s ASIC capacity, attacking the network is costly on an ongoing basis. That’s because running ASICs requires a lot of electricity, and not only is such energy expenditure expensive, but attacking the network is also likely to reduce the value of the bitcoins that are awarded to the attacker. So the attacker has to acquire expensive specialized equipment, has to use a lot of costly electricity in order to maintain the attack on an ongoing basis, and sees the value of his mining reward in bitcoins fall due to the attack that he himself has launched.

Lastly, a “successful” attack doesn’t even accomplish much. It only allows the attacker to (1) refuse to validate legitimate transactions (i.e., block them and thereby mine empty or partially empty transaction blocks), (2) double-spend bitcoins in addresses for which he has the private keys, or (3) if he can muster a majority of the mining power of the entire network, reverse transactions in recent history. We’ll examine these categories of attack in greater detail in Chapters 10 and 11.

We have now covered the basics of Bitcoin. In the following two chapters, we’ll examine Bitcoin in the context of what we learned in earlier chapters about what makes good money.