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Proof of What? Proof of Trust!

It is pretty obvious that BitCoin went back all the way through human money history, and uses the same principle shell money had to give value to a coin: the miners do a proof of work. Like the shells, the amount is limited, and the difficulty raises with the amount of work available. The limited amount of mineable BitCoins mimics another property of shell money, and with a quickly growing economy that actually uses cryptocurrencies, it becomes a quickly deflating currency. That makes it ideal as speculation object, and very bad as trade token.

There is a disastrous side effect to this: Mining burns energy, ASICs are developed and manufactured, if you try to avoid ASIC mining, all available cost-efficient GPUs are bought and gamers are frustated, because they simply can't get hold of them. This is far worse to hoarding gold, because nobody actually needs gold anywhere near the available quantities used as money.

And all that big amount of work is converted into very few actual transactions. BitCoin exchanges pop up that allow people to trade with them without actually making transactions in the BitCoin protocol; and without those transactions, that money is not secured. Virtual bankrobbery occurs, and it shows that people who don't know history are doomed to repeat it: Regulation is there for good reasons.

Note that the energy consumption is not a function of how many transactions happen, it's a function of how much reward the miners get. That means higher bitcoin prices result in higher energy consumption, because the proof of work scales with the amount of available work, and that inflates with the price per coin.

That means that the lightning network, while improving scalability, does not cut down the hidden transaction costs: the liquidity required for the lightning network will drive the price per coin up, so that mining is so lucrative that miners will buy more ASICs and burn more coal in turn.

What is a BlockChain?

We need an actual definition; technically, even a git repository has some important properties of a BlockChain. The chain of hashed blocks is one aspect, the consensus algorithm the other:

How to cheaply secure the BlockChain

So let's take a step back, and look why there's a need for the proof of work (the consensus algorithm): The basic idea is that of securing the BlockChain against an attack that allows double spending. The BlockChain itself is immutable if you have access to the last hashed block: Through a link of hashes, every other block before can't be changed without changing the last block, too. The problem is: how do you know it's the valid last block?

BitCoin's proof of work concept is that you need to invest a certain amount of work to sign a block, so the older a block is, the more work it takes to forge it, and reciprocal, the more work that went into a chain, the more “true” it is. That concept originates from a crypto-anarchic design: in the BitCoin world, everybody is pseudonymous, so even the signature for the blocks are done by anonymous cowards (and that is just a hash, there's no identity associated with that hash). We are back before the first promissory notes, who at least had identifyable individuals or institutions as signers.

We have to go one more step back, to see where that attack originates in the threat model: it's a man in the middle (MITM) attack to prevent the proper spread-out of the current block. A MITM attack to a P2P network. Preventing MITM attacks has other attempts to solve them, either, even trust on first use (TOFU) does a descent job. And that's likely the explanation, why even AltCoins with very little work didn't get hacked on that part.

Any sane secure peer to peer network ought to have something better than nothing: TOFU or PKIs that improve trust. And that a full-blown PKI takes away the anonymity is not a problem: A big warehouse of ASICs to mine BitCoins also completely blows the anonymity of the miner. The miner or signer doesn't need anonymity; the parties that actually exchange coins are the ones who want anonymity.

So to secure the BlockChain requires two things: First, the operators of full nodes (those who take and validate transactions) need to have known keys, so you can connect to them without MITM attacks.

Second, you can just make sure you have enough sanctions and auditable signers of these blocks. The block chain with the highest amount of trust wins. How do you measure trust? Can you enumerate trust? Reliable signers have signed many blocks. Game theory shows that repeated collaborative interactions are more rewarding than cheating, which can be punished with long-term effects. Also: the more signers you have, the better. Verified signers are better than anonymous signers, because anonymous signers can be a sybill attack.

To avoid intruders re-signing older blocks, rotate signature subkeys each round. A well-behaving signer will lose the old key each round (just keep it long enough so that the commitment of the new key in the next block is confirmed), and therefore is unable to tamper old blocks; similar to ephemeral encryption, where you are unable to decrypt the traffic yourself later.

You can have a proof of work to prevent sybill attacks, e.g. mandating that to enter the trust ring, you need to have a key with a certain prefix. That would be one-off work, because then you want to stay there with that identity, and accumulate more trust by signing in consensus. It just creates an entry barrier and avoids DDoSing the ledgers with applications for participation.

Of course, every transaction within the block ought to include the previous block's hash as starting key for the hash calculation, so that they contribute to the unchangeable chain, and can't be moved to any other fake chain (they won't verify there). Furthermore, each transaction (despite being anonymous) adds to the trust value: more transactions in one block means that it is more trustworthy, because more people found its way to this branch of BlockChain reality.

Note that the partitioned BlockChain below makes it far more expensive to fake a chain: You need to generate signatures and activities in all of them; the fake activities you generate are with the coins you own; you have no others. Sanctions for misbehavoir can make sure these coins are lost; the fake chain is the proof of misbehavior.

Those additional coins could be used to compensate for the loss of the victim of double spending.

Where to hijack the proof of work BlockChain

Let's assume we can attack BitCoins block chain: Where would we attack it? At the end, which allows us to do double spending of the coins we own? Who would do that? Probably someone with a lot of coins inside, so proof of stake is a bad idea (especially, since that allows you to spend the same coin not just twice, but many times; even if you lose the stake in question, it's still a big win).

Or attack it at the front, where most coins have not yet been mined, and by producing a fake fork of all the transactions afterwards, you could turn over all the coins in the entire BitCoin universe to you. All you need is enough power to calculate a full chain considerably faster than the miners.

Is that viable? It won't go in undetected, but since the early mining was more profitable in numbers of coins, and far easier (because the difficulty was much less than today), it's technically not that hard. And “longest chain” is not sufficient to defend that attack: It needs to be the chain with most work involved in. The fake chain could be one where the adjustment for the difficulty is set too low.

BitCoin addresses that, the chain length is the sum of the difficulties. But the problem remains: Let's say China confiscates the ASIC miner's equipment, which will result in a significantly reduced difficulty in the rest of the world's BlockChain. And then it uses the confiscated equipment to construct a chain that has more difficulty in it than the entire chain from the rest of the world — it might take a year or two, but it's doable.

And then it busts the entire BitCoin ledger by releasing that chain, which essentially has only unspendable coins inside (coins owned by the Chinese), because in that revision of history, they were all mined by someone else.

You still need to spend more effort on that as the miners spend, but you then own all the cheap, easy to earn early coins.

But in fact the by far easiest hijack is to create a slightly incompatible protocol. This is deliberately splitting the network, out in the open, with effectively not much work required, and this allows to double-spend, even though the BitCoin fork doesn't have the same price. But the price is not the point: The point is the promise of the unique asset. Just think of real estate in the BlockChain. By having forks, BitCoin shows that it can only fulfill that within a consent of the protocol, and that's actually outside the chain itself.

So the executable protocol spec, the code for checking a block for validity itself should be part of the chain, and only updated in consensus. And any transaction need to link to the protocol block, and if a transaction is found that links to a not accepted protocol block, it will cause a quarantine of the corresponding coin. That means you get punished for spending it in the fork.

It needs to be done in a way to keep the balance.

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