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Can China Control, Destabilize, or Destroy Bitcoin?

A report by Princeton University and Florida International University explores the possibility of the consequences of a Chinese attack on Bitcoin.  The focus of the paper is to analyze the worrisome political and technological connections between China and the crypto world. And how the entire ecosystem could be affected should China decide to shift its present moderate stance to an adversarial one against Bitcoin. Even though the Chinese government has been keen to present an ambiguous face towards cryptocurrencies, crypto investment in China far outpaces that of any other country. Therefore, the report poses a question that though acknowledged it has been largely ignored; whether China could affect Bitcoin if it decided it to. The answer would be based on motivation and whether or not it possesses the capabilities to do it.

Context

China is a cornerstone in the stability, growth, and future of Bitcoin.  First, it provides extremely cheap hydro-based electricity, a necessity to power the electricity thirsty mining equipment. The government even incentivizes low electric rates to miners. Second, it is home to the largest mining company in the world – Bitmain; which controls 80% of the mining equipment market, and 42% of the miner pools. And third, the company is extremely influential in the funding of new large and SME crypto-related Fintech start-ups.

Motivation

Assuming China decided to turn its back on Bitcoin, a likely motivation would be to impact the US market as a whole. This motivation would be influenced by the ongoing trade war between the two countries. US financial institutions are key leaders in the development and operation of crypto currencies.  For example, the Bitcoin foundation, Ripple, Coinbase, the Gemini Exchange, and major banks and investors are all based in the US. Denying all these institutions access to Bitcoin would significantly impact the financial growth of US markets.

Investors and developers are all too aware of China’s companies potential to monopolize many aspects of the crypto market.  Vitalik Buterin pointed out Bitmain’s dominance in the hashrate capacity of Bitcoin. And Ricardo Spagni, the creator of Monero, warned that Monero’s protocol will be changed every six months to slow down the ASIC hardware from completely monopolizing mining of their coin. Therefore, China is likely to encounter resistance if it tried to disrupt the Bitcoin economy; the fight would be decided by their capabilities to overcome it.

Capabilities

China is more than capable to execute a coordinated attack against Bitcoin. This is thanks to its centralized, almost dictatorship control over its population, industries, and banks. Through this power, it can certainly influence or decide on how companies can act upon the [Bitcoin] market. A large number of top 100 or even top 50 companies like Neo, Ontology, VeChain, Qtum, and Gas are based in China. And investment firms like Draper Dragon, Nirvana Capital, Metropolis VC, and Sequoia Capital are major investors in new projects and companies. In addition, the government has absolute media and internet control which can use to limit access to exchanges and wallets. And should anyone dare challenge the authority of the central government and attempt to breach the “Great Firewall.” The government can make use of their publicly taunted “Grand Cannon” (A glorified Ddos (Distributed denial of Service) attack) to enforce censorship.

Analysis

China is certainly capable to disrupt and destabilize Bitcoin if it chooses to. But it is highly unlikely that it can destroy it. In order to destroy it, it would need a majority of the nodes in the Bitcoin network and total control of its mining production. Both of which it currently doesn’t have. In the event of a combined Ddos and mining shutdown attack, transactions would slow to a crawl and production likely minimized. But the network would survive and continue operating at reduced capacity, maybe 20% or less. This disruption however, would create an opportunity for other miners to mine Bitcoin in the absence of enterprise grade ASIC miners. And other nodes would replace the ones compromised in a Ddos attack. Hence, Bitcoin would survive just as it has for a decade.

However, the Chinese government is not naïve to the potential Bitcoin has to offer, both financially and technologically. China will gain nothing by trying to stop Bitcoin; instead, it will lose its lead in research and development. In addition, Bitcoin is giving the country direct access to foreign markets which can become dependent on Chinese crypto products. As of now, 3 of the 21 EOS block producers are located in China. This virtually guarantees China will enjoy an advantage in the future development of Daaps and its derivative markets. At the moment China is playing a successful double game. It is balancing its policies on restricting and promoting Bitcoin’s advance in the country. And an aggressive posture against Bitcoin is remote as China has more to gain by accepting crypto than destroy it.

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