Sabotaging Bitcoin

Summary

I find myself in the unusual position of defending Bitcoin from its critics, if only reluctantly. In 2024 Soroush Farokhnia & Amir Kafshdar Goharshady published Options and Futures Imperil Bitcoin's Security and: showed that (i) a successful block-reverting attack does not necessarily require ... a majority of the hash power; (ii) obtaining a majority of the hash power ... costs roughly 6.77 billion ... and (iii) Bitcoin derivatives, i.e. options and futures, imperil Bitcoin’s security by creating an incentive for a block-reverting/majority attack. It is worth noting that they are not talking about profiting from double-spending. The Bitcoin blockchain transacts around $17B/day of nominal value in around 450K transactions (average ~$38K), but in 2021 Igor Makarov & Antoinette Schoar found that: 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity ... exchanges play a central role in the Bitcoin system. They explain 75% of real Bitcoin volume. Of course, just because they aren't "economically meaningful" doesn't mean they aren't worth attacking! The average block has ~3.2K transactions, so ~$121.6M/block. As a check. $121.6M * 144 block/day = $17.5B. So to recover their cost for a 51% attack would require double-spending about 8 hours worth of transactions. I agree with their technical analysis of the attack, but I believe there would be significant difficulties in putting it into practice. Below the fold I try to set out these difficulties. First, I should point out that I wrote about using derivatives to profit from manipulating Bitcoin's price more than three years ago in Pump-and-Dump Schemes. These schemes have a long history in cryptocurrencies, but they are not the attack involved here. I don't claim expertise in derivatives trading, so it is possible my analysis is faulty. If so, please point out the...