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The Implications of a Binance-Led Bitcoin Reorg

Talks of a reorg on the Bitcoin blockchain took place last week. While theoretically possible, the complex incentives of miners make such an event extremely difficult to carry out.

Quick Take;

  • A reorg of the Bitcoin blockchain is discussed after 7,000 bitcoin were stolen from Binance hot wallets
  • A reorg theoretically but almost impossible to carry out in reality as miners and users are highly incentivised to stay on the current chain
  • Replace by fee is a feature in the bitcoin protocol that could have been used to prevent the hack from taking place

Talks of a reorganization (reorg) on the Bitcoin blockchain took place earlier after a hack of 7,000 bitcoin took place on the world’s leading cryptocurrency exchange Binance.  The idea originated with Bitcoin Core contributor Jeremy Rubin and quickly sparked intense discussion and debate regarding the feasibility of such a reorg.

The idea is straightforward. Miners receive 12.5 in block rewards. With 7,000 bitcoin vastly exceeding what miners have received each block since the hack, it would be theoretically possible to incentivise miners to reorganise the ledger.

A reorg happens when a new chain with greater accumulated proof of work i.e. more blocks is revealed to the network.

By posting a transaction from the address of the hacked coins with a huge transaction fee, miners might be incentivised to reorganise the blockchain so that the hack never took place enabling miners to process the transaction with the large mining fee.

However, this would result in two competing chains. And the logistics of carrying out such an event extend far beyond just incentivising miners.

The Logistics of the Reorg

While the idea of the reorg is simple, the incentives playing into actually executing such an event are highly complex. Even if a sufficient number of miners agreed to attempt a reorg, Bitcoin developer Jimmy Song notes that there is a significant risk for agreeing miners as they “significantly raise the risk of wasting hash power that could be productively put to mining the longer chain.”

If such a reorg were to be attempted, it would require an agreement from the vast majority of mining entities. With research from TokenInsight reporting that the top four pools accounted for over 50% of the hash rate of the Bitcoin network in the first quarter of 2019, such an agreement is not outside the realms of possibility. However, every miner that disagrees to the reorg would significantly increase the cost of executing the reorg.

Time is another important element playing into the cost of a reorg. The longer an agreement from miners takes to be established, the deeper the transaction with the hack goes into the blockchain, and the longer it would take a reorganized chain to overtake the current chain.

With 200 block confirmations after the hack had taken place, the possibility of such a reorg actually taking place has long diminished. As the discussion relating to the difficulty of carrying out such a reorg heated up, the CEO of Binance, Changpeng  Zhao (CZ) publicly acknowledged that it was not feasible.

Another factor working against the execution of a reorg is the potential impact such an event would have on the user confidence in bitcoin. CZ noted the potential to “damage credibility of BTC”.

Bitcoin miners are also extremely exposed to the value of their ASIC hardware and the value of bitcoin, acting as a disincentive to mine on anything but the current chain. While GPU miners can easily repurpose their hardware, bitcoin miners are less flexible, only able to repurpose their hardware for other chains running the SHA-256 algorithm.

The balance sheet of bitcoin miners is closely tied to the value of their ASIC hardware and bitcoin itself. This aligns miner incentives with the long-term health of the network providing strong incentives to build upon the current chain.