The Unreasonable Fundamental Incertitudes Behind Bitcoin Mining

Bitcoin is a “crypto currency”, a decentralized electronic payment scheme based on cryptography. It implements a particular type of peer-to-peer financial anarchy. It has very recently gained excessive popularity and attracted a lot of attention in the mainstream press and media. Scientific research on this topic is less abundant. A paper at Financial Cryptography 2012 conference explains that Bitcoin is a system which uses no fancy cryptography, and is by no means perfect [4]. Bitcoin depends on well-known cryptographic standards such as SHA256. In this paper we revisit the cryptographic process which allows one to make money by producing new bitcoins. We reformulate this problem as a specific sort of Constrained Input Small Output (CISO) hashing problem and reduce the problem to a pure block cipher problem, cf. Fig. 2. We estimate the speed of this process and we show that the amortized cost of this process is less than it seems and it depends on a certain cryptographic constant which is estimated to be at most 1.89. These optimizations enable bitcoin miners to save tens of millions of dollars per year in electricity bills. Miners who set up mining operations face many economic incertitudes such as high volatility. In this paper we point out that there are fundamental incertitudes which depend very strongly on the bitcoin specification and that this is specification is NOT written in stone. The energy efficiency of bitcoin miners have already been improved by a factor of about 10,000 since bitcoin have been invented, and we claim that further improvements are inevitable. Better technology is bound to be invented, would it be quantum bitcoin miners. More importantly, the specification of the problem to solve is likely to change. A major change in the Proof of Work function have been proposed in May 2013 at Bitcoin conference in San Diego by Dan Kaminsky [47]. However, any sort of change could be flatly rejected by the community which have heavily invested in ASIC mining with the current technology. Another question is the reward halving scheme in bitcoin. The current bitcoin specification mandates a strong 4-year cyclic property. This cycle is totally artificial and is simply an artifact of the current specification. We find this property totally unreasonable and harmful and explain why and how it needs to be changed.