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Coinometrics

The 50% Club
COINOMETRICS Briefing #1
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The 50% Club
Authors
Jonathan Levin jonathan.levin@coinometrics.com
Andrew Geyl ooc@coinometrics.com

Executive Summary
! The 50% issue is a recurring issue in the Bitcoin network due to the underlying economic incentives
facing individual miners
! Miners with only slightly less than 50% can pull off very similar types of attack as a 50% pool
! The stochastic nature of the block solving process means that a pool could easily have a hashrate
above 50% for a short period even though longer horizon estimates suggest that they are smaller
Introduction
The existence of a single entity controlling 50% of the mining capacity on the Bitcoin network is a failure of
Bitcoin, not because the entity could act maliciously with no recourse or it has a negative impact on the
price but because Bitcoin can no longer be called a decentralized system
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. The purpose of Bitcoin as a
decentralized system was to distribute trust between many different entities that would be unable to
collude against the interests of the users. The existence of a mining pool that is even close to 50% breaks
this and thus the foundations of Bitcoin. This briefing is a study of the past performance of the Bitcoin
network when a single entity approaches the 50% mark and explains how, at Coinometrics, we continue to
monitor this situation very carefully.

The 50% club has been threatening to accumulate more members for reasons that need to be resolved by
the community. The recurrence of the issue is caused by the current economic incentives that face
individual miners. Individual miners are free to select a mining pool of their choice and the cost of switching
between them is negligible. However there exist two incentives to join the largest pool.
1. The reason for mining pools existence is reduction in variance of returns. Mining returns are stochastic and
therefore the timing of the reward for solo mining is extremely uncertain. Miners want to extract the maximum
value from their current hashing power at the current difficulty as each rise in Bitcoin difficulty reduces the
effectiveness of their hardware. The highest variance reduction is found in the largest pools.
2. For a larger pool, miners spend less time on average working on redundant mining problems. When a miner
solves a block they immediately start working on the next block whereas all other miners have to wait to verify
it for themselves. Larger pools solve more blocks creating a small advantage. Information takes time to travel
across the Bitcoin network and as a result some miners spend longer than others working on old blocks that
will never make it on to the blockchain. This increases the expected return per hash done in a larger mining
pool. While these economic incentives are very difficult to circumvent we can create an incentive compatible

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Malicious activity includes reversing users transactions, ignoring other miners blocks, blocking certain transactions
and selfish mining. See here for a very good summary (Hacking Distributed article).
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system by making it prohibitively expensive to run pools over certain sizes. This is currently being addressed in
many proposals to change the proof of work.

Bitcoin is based on probabilistic outcomes. The difficulty of creating new blocks is based on finding the
solution to a cryptographic puzzle. The security of the network therefore relies on the outcome of random
process and is not deterministic. A miner with 48% can reverse 10 confirmations with an 85% success rate.
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Even at the chosen 40% self-imposed cap, the mining pool could overturn six confirmations with 50%
probability. Recognising that this is an unregulated market and the miners will decide the eventual
outcome, the community must vocalise what levels of market concentration are acceptable given the
probabilistic nature of security. Are we comfortable with one entity being able to overturn 6 confirmations
with 50% success rate?

Estimation
Estimates of the network hashrate and market share of the mining pools are almost by definition imprecise.
The hashrate of pools that do not release public figures must be inferred from the number of blocks solved
by the mining pool over a long period.
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For the mining market to serve its purpose in delivering the service
of security and decentralisation to the Bitcoin network through intense competition, pools should be
encouraged to publish their hashrate publicly.

At Coinometrics we use a combination of different observation periods and pool reported data to come up
with an accurate measure of the network hashrate and the market concentration of Bitcoin mining.

Analysis
There has never been a pool or identifiable solo miner that has solved more than 50% of the network blocks
for any week (Monday to Sunday, UTC). In the past there has been several instances of a pool solving more
than half of the blocks in a day. However Ghash.io has never solved more than half of the blocks in a single
day.

In the past measures were taken to ensure that a single mining pool did not dominate the market. Michael
Marsee of BTC Guild implemented changes to their protocol that caused the sharp decline of their network
hashrate in May 2013 (See Figure 1). Voluntary acts by pools can thus easily reduce the risk of a pool joining
the 50% club. Figure 1 shows the three pools that have come closest to passing the 50% mark. The line
graph shows the weekly smoothed estimate of the number of blocks solved and the individual points show
the observations. There are individual points in the proportion of daily blocks solved around the 50% mark
as shown in the figure. The pools can be shown to easily surpass 25% and 33% of the network for significant
periods of time, which may also threaten network security and competition.
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The Bitcoin network does not have an internal concept of time. The timestamps put into blocks are
sometimes widely inaccurate as the criterion for a valid timestamp is fairly loose. Bitcoins concept of time is
defined by the release of new blocks on the network. We can therefore change our unit of interest from
time to a rolling window of the number of blocks. This allows us to study periods that do not align with UTC

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Source: Rosenfeld (2012) Analysis of hashrate-based double-spending https://bitcoil.co.il/Doublespend.pdf
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Using a shorter period yields more innacurate measures requiring larger confidence intervals. There is a tradeoff as
using a 7 day average introduces a significant lag to the current estimate of the hashrate.
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See here for an explanation of how large concentrations of hashing power can introduce incentives to disobey the
Bitcoin protocol. Monopoly power also may raise the long run equilibrium transaction fees.
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days and weeks. We use a 1000 block rolling total (approximately 6 to 7 days) and a 150 block rolling total
(approximately one day). There were no results close to 50% of the network for the 1000 block rolling total,
but many for the 150 block rolling total.



Figure 1. Historical percentage of network blocks solved by the biggest block solvers

Source: Coinometrics, Organ of Corti
The results can clearly be seen in Figure 2. There are far more instances of pools exceeding 50% of the
blocks solved in the 150 block window than the daily window applied initially. We find this method to be
more accurate than relying on the UTC timestamps of the blocks. On one particular day Ghash.io solved 31
blocks according to the UTC timestamps but their 150 block median percentage of the network was above
50%. DeepBit also had many more exceedences using the rolling window method.



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Figure 2. Historical percentage of network blocks solved by the biggest block solvers

Source: Coinometrics, Organ of Corti

Evaluation and concluding remarks

Even when the estimate of the intensity function (the smooth lines in Figure 2) is only a approaching 45% of
the network, the stochastic nature of the block solving process means that a block solver could easily have a
hashrate above 50% for a short while. This needs to be considered when deciding the tolerance level of
market concentration. The three members of the 50% club have in the past had a sufficient proportion of
the network to successfully mine selfishly, or perform double spends with a good probability of success for
significant periods of time. As more complex and valuable services are built on the blockchain calculating
the risk of these events occurring is still in its infancy. Action must be taken, BTC Guild, has been the only
member of the 50% club to implement a protocol change that successfully lowered their share of the
network. We applaud the recent actions of Ghash.io to remedy the situation but stronger actions must be
taken while consensus builds around the different technical solutions. At Coinometrics we are committed to
publishing accurate measurements and analysis on the structure of the mining industry.