Selfish mining is a strategy for mining bitcoin in which groups of miners collude to increase their revenue. Bitcoin was invented to decentralize production and distribution of money. But selfish mining can result in centralization of bitcoin mining operations.
Breaking Down Selfish Mining
Selfish mining was first proposed by Cornell researchers Emin Gün Sirer and Ittay Eyal in a 2013 paper. They proved that miners can earn more bitcoins by hiding newly-generated blocks from the main blockchain and creating a separate fork.
Bitcoin mining relies on miners who solve cryptographically complex puzzles to generate coins. Income from the activity varies because the process is dependent on several factors, from the difficulty of puzzles being solved to electricity costs to the quality of Internet connections. The bitcoin protocol is configured to reward miners in proportion to their mining output. This ensures that even if miners organize themselves into large pools, the rewards are still dependent on coins produced by individual miners in the public blockchain.
But the above scenario assumes that miners will make their newly-generated blocks available on bitcoin’s public blockchain. In their 2013 paper, Sirer and Eyal showed that miners can increase their share of overall revenue by hiding new blocks and making them available to systems within their private network. This practice speeds up the discovery process and irons out infrastructure problems related to mining, such as network latency and electricity costs.
Undermines Bitcoin's Decentralized Nature
Initially, the forked blockchain will be shorter than the public blockchain. However, selfish miners can strategically time their display of new blocks such that honest miners from the public blockchain abandon their own chain and join the private chain. Subsequently, the private chain mines new blocks within its pool and hides the newly-generated blocks.
In the meanwhile, the public blockchain continues mining new blocks. The process is repeated until the private blockchain is greater the public one. Now the private chain reveals its blocks again, and miners from the public chain abandon their blocks to join the private chain because it is more lucrative. Sirer and Eyal analyzed resources wasted for both chains and determined that selfish miners possessed a competitive advantage over a miner on the public blockchain because their rewards are comparatively greater due to less wastage.
“Once a selfish mining pool reaches the threshold (of a public blockchain), rational miners will preferentially join selfish miners to reap the higher revenues as compared to other pools,” the researchers write. According to them, the scenario may result in a situation where the selfish mining chain becomes a majority of the public blockchain. This will collapse bitcoin’s decentralized nature and a selfish pool manager will control the system.
Zero-Sum Game for Bitcoin's Future
To a certain extent, bitcoin mining is already centralized with China, a country that is responsible for mining two-thirds of all bitcoins mined in existence. This has led to discussions within the cryptocurrency ecosystem about the perils of selfish mining and centralization of bitcoin production. But economists have argued against the effects of selfish mining and consider it a zero-sum game for bitcoin’s future.
For example, Bloq economist Paul Sztorc says that if all miners copy the selfish mining strategy, then “you end up right back where you were before.” According to him, miners will stop selfish mining after they realize that “they’ve only harmed themselves.” Sirer himself has discounted the threat of Chinese miners taking over bitcoin production. “It’s not the case that all Chinese miners are part of the same enterprise or are colluding,” he told Washington Post.
There is also research concerning the topic. In a 2014 paper, Boston University Ph.D. candidate Ethan Heilman proposed Freshness Preferred, a defense mechanism against selfish mining. Under that scheme, selfish miners would be penalized and their profitability would be reduced by using unforgeable timestamps to penalize miners who withhold blocks.