Selfish Mining

Categories: Econ

During the Gold Rush, selfish mining wasn’t only okay...it was expected. With decentralized cryptocurrency mining (like Bitcoin), selfish mining is...not so cool.

The whole premise of Bitcoin is that it’s decentralized. Rather than some institution verifying transactions (an institution the public may or may not be able to trust) there is none. Rather, everything is encrypted and publicly posted. It’s hard to lie, cheat, or steal when it comes to Bitcoins, because everyone can see the public blockchain ledger.

Selfish mining threw a wrench into this system. It's when groups of Bitcoin miners work together to gain more Bitcoins (a type of centralization) via hiding newly generated blocks on from the public blockchain ledger.

There are Bitcoin miners who pool together their resources, but that’s not selfish mining. It’s when a group of miners chooses to not put their blocks on the public blockchain. Considering how Bitcoin mining is designed, this gives the advantage for mining future Bitcoins to the group hiding their blocks. By making their own closed-off system within the Bitcoin mining world, it’s kinda antithetical to the whole decentralized thing that Bitcoin is about.

This is a BFD, potentially. It’s not just some ideological tiff. It could be the end of Bitcoin as we know it. Since it’s only rational to partake in selfish mining (greater rewards), then the logic follows that, if everyone started doing this, Bitcoin won’t be decentralized anymore...it will be controlled by the groups’ managers. If a penalty were produced for people who are withholding their blocks from the blockchain, that could potentially help, but there’s no institution laying down the laws. Hmm.

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Finance: What is Bitcoin?4 Views

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and finance Allah shmoop What is Bitcoin shmoop All right

00:07

people Well for starters it's virtual currency What is that

00:11

like Monopoly money Well kind of Okay but wait So

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wh what's not virtual currency This stuff really Bills coins

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gold A check with your validated signature on it when

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you actually have cash in the bank Money in the

00:24

old world is pretty much anything that everyone agrees is

00:27

valuable Like over the history of civilization People have used

00:30

all sorts of weird items to pay for things like

00:33

shells and cattle heads in whiskey and stuff like that

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Credit cards apple pay in Venmo Yeah way easier to

00:40

buy a lot with then 182 seashells All the above

00:44

are Fiat currency which means they're not backed by any

00:48

specific commodity or thing of value Instead they're backed by

00:52

the government that issues them a handshake and a promise

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and that's pretty much it Well in the old days

00:57

if you had a dollar meant there was a dollars

00:58

worth of gold out there with your name on it

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you could walk into a bank and demand your little

01:03

chunk of the yellow metal in return for that paper

00:53

$20 bill The dollar was worth a dollar because well

01:09

you could change it into that much worth of gold

01:12

What we pretty much gave up on the gold standard

01:14

in America anyway for good around the time of the

01:17

Great Depression and now dollars worth a dollar Because why

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Well we say it is or more precisely because the

01:23

government says it is Yeah the United States right to

01:26

tax its hard working citizens is what backs up that

01:29

promise Well Fiat currencies air printed by a government and

01:32

have value in part Or mostly because while the citizens

01:35

trust in the government and in part well we all

01:38

agree that paper bill has value Okay so now to

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the virtual part of virtual currencies have moved on from

01:44

government participation They have value because well the users of

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them say they have value That's it Not much else

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to it The idea of virtual currencies isn't really all

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that new Ask your parents about these things Yes original

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Disney dollars You'd buy a book of them for like

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20 bucks or so in the A ticket on Lee

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got you into like the garden tour of carefully manicured

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roses is by Carnation Plaza Then you have the e

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ticket at the other end the best one that got

02:12

you into the parts of the Caribbean in the haunted

02:14

house You know when it came out well the Disney

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dollars were a virtual currency on Lee They were on

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paper and well really low tech Yeah And then they

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got wet after you landed through the Matterhorn that get

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all pulped out you have to throw him out Was

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very sad All right Zip forward 1/2 century Nowadays the

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virtual part means the same thing It means when we

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say virtual reality Basically it means that exists in a

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computer It's not riel It's an algorithm somewhere Well some

02:39

clever entrepreneurs decided that the U S greenback didn't offer

02:42

enough flexibility or rough you know anonymity You know if

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you wanted to buy nuclear secrets or child porn or

02:48

illicit drugs or any other ill miserable and awful purchase

02:52

that buyers didn't want anyone around them to know that

02:54

you were buying while then here was your ticket Bitcoin

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is security It comprises a complex system of quote log

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in rappers unquote whereby a user must wrap around content

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all kinds of security codes which protect the valued financial

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nut inside the hard shell Initially the market was seated

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with a kind of financial Easter egg hunt where the

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controller's a Bitcoin buried value nuts all over the web

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Nut hunters had to answer extremely complex math questions in

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order to win their prizes But if they won they

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were worth real cash money Bitcoin is the most famous

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virtual currency but it's far from the on ly one

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e Syria is a big one You've also got light

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Klein Dodge a Coin and Manero There are lots and

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lots of competitors and there's a whole market of people

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looking to make new ones all the time They have

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conventions and workshops and organizations Yeah it's a thing And

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why not If you can get your virtual currency Tio

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take hold while you have an instant fortune literally printing

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your own money but not counterfeit like actually your own

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money like you were the central bank or treasury of

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your own country The trick of course is getting other

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people to come on board and trust you You need

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other people to agree that your virtual currency is actually

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worth something Well a big part of the sell job

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has to do with how the new currency is propagated

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How are more of them made How are they traded

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How do they work You know because it doesn't take

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much to make more virtual currency Like almost literally nothing

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at all Hear it Shmoop Central We started making shmoop

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points Doesn't take much input to make a 10 more

04:22

shmoop points or 1,000,000 or a trillion more shmoop lines

04:25

It all takes the same virtually Neil computing power But

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when people used gold for money well they knew that

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gold supply was limited There was gold mining that brought

04:34

new gold to the surface but the total amount of

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gold was finite and it was really hard to get

04:38

while sometimes it just showed up in a river in

04:40

California or South Dakota or something And people would rush

04:42

there with hands and pick axes But generally speaking globally

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someone couldn't just announced that they now had another 1,000,000

04:49

ounces of gold in their computer deal with it Well

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virtual currencies try to follow this model in their own

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virtual way to the extent that while the process usually

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used to produce more virtual currency is called mining Yes

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from the gold concept new supplies of the currency appear

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using harder and harder math problems done by computers Convincing

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users that this process of making the currency is on

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the up and up is part of the challenge of

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founding a new currency But national currencies have a head

05:16

start in this area right You trust the United States

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more than some kid who was born in 1989 by

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virtue of being sovereign states while recognized by other sovereign

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states at least geographic countries have some credibility but same

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forces come into play Gold needed to be mined and

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there was a finite amount of that on Earth Countries

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could just print all the currency they wanted using higher

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and higher denominations like you know with virtual currencies Well

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there was no practical limit no real cost of production

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But there is a consequence to producing tons of the

05:46

stuff If a country starts printing more and more currency

05:48

it sparks inflation devaluing its own individual currency unit eventually

05:54

maybe getting into hyper inflation territory and people running around

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with wheelbarrows full of cash to buy a carton of

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milk The same supply demand dynamics of basic EQ on

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work for regular currencies and for virtual currencies Think of

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the competing virtual currencies like the different national currencies we

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have in the non virtual world We've got U S

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dollars in British pounds and euros and again in Swedish

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krona and a whole bunch Other stuff right Well these

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currencies worked perfectly in their home countries but out of

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context there value gets a little shaky Try to use

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some Swedish krona to buy a hot dog from a

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New York street cart vendor guy or offer again to

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buy meatballs off a meatball cart in Stockholm That's kind

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of funny but it doesn't work We'll Bitcoin and the

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other Cryptocurrencies have similar problems If you want to buy

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a rocket launcher on the dark Web Bitcoin works great

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But if you want to buy a box of cookies

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from the Girl Scouts standing in front of the grocery

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store well it's not gonna work You'll need some good

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old fashioned US dollars In that way the relationship of

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crypto currencies to the general market is similar to how

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we treat stocks that trade on the stock exchange Their

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recognised to have value sure but the value is often

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tracked by an outside currency like the dollar Well Bitcoins

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and other virtual currencies trade on markets You Khun swap

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them out for real dollars and use those dollars to

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buy Girl Scout cookies or street hot dogs or whatever

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Just like stocks you might hold 100 shares of Google

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but if you want to spend some of their value

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you have to turn them into dollars right like a

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stock or any kind of market Traded anything Bitcoin and

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other virtual currencies or subject to bubbles and bus The

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bubble part happened for Bitcoin in 2017 At start of

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the year one Bitcoin was valued about 900 bucks Then

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it took off sky rocketing through the year it peaked

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in December of that year it just under $20,000 Then

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the bubble burst At the end of well January 2018

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it had fallen back to around 11,000 was below 10,000

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by February and within a year of its peak it

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was in the $3000 range Yeah about 80% off its

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highest value well even off its highest levels The market

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for Bitcoin remains big because of its shifting value The

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size of the Bitcoin market changes is the dollar denominated

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value of the currency moves But as of late 2018

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early 2019 the market cap for Bitcoin has bounced around

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$100,000,000,000 Well the idea behind Bitcoin maybe great get the

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government out of currencies Borderless money for the future But

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their issues One is security Like governments have to fight

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counterfeiters The more valuable of virtual currency becomes well duff

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The more likely there are hackers out there looking to

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crack the code and they don't have to be sinister

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creep working in secret in their mommy's basement Countries can

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fight counterfeiters because they can pass laws making counterfeiting illegal

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Bitcoin can't do that meaning that if Google wanted to

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put its sizable brainpower to work making Bitcoins free for

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anyone well there'd be nothing to stop them along the

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same lines Virtual currencies could end up trading one authority

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like governments for another like corporations like if Google or

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Apple or Disney decided to make their own currencies and

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squeeze out Bitcoin Any theory Um and the others Well

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that happens We're looking at the future when the Girl

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Scout is at the door knocking away and all she

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takes is ah Google coin And you only have Disney

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dollars Three point Oh and your virtual wallet Yeah No 00:08:56.744 --> [endTime] cookies for you Morning

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