Bitcoin works using an open distributed system, in which ‘miners’ are rewarded with bitcoins for payments processing work. Participants form pools where they can share and trade rewards, and these pools form an essential part of the system.
Those participating in small pools can operate with reasonably low business risk. Large pools, however, can attack each other, with one pretending to work on another’s behalf and taking a cut of the proceeds without ever actually contributing.
According to the white paper, these kinds of attacks are not currently very prevalent with pools agreeing not to operate in this way, but the balance is unstable. As soon as one attack happens, others will retaliate. This means profitability of public pools will drop and participant could move towards smaller, closed pools.
If pools grow too large they could pose a problem for the whole bitcoin system, and, according to the report, the community faces a challenge in dismantling them.
The white paper suggests that short-term incentives could encourage a natural dismantling, making the whole system more distributed and therefore more robust and secure. Currently, a small number of large pools dominate the system, and dismantling these will give the system a more stable footing.
Peter Ware, director of the SWIFT Institute, said: "Bitcoin is a hot topic in the industry at the moment and our latest research gives interesting insight into the Bitcoin system using game theory to highlight potential pitfalls and suggest ways in which to improve overall stability of the currency."