Censorship Resistance of Bitcoin and Ethereum

Original title: "Censorship resistance in Bitcoin and Ethereum"

Original author: Allen Zhao, Mustafa Yilham, Henry Ang & Jermaine Wong, Bixin Ventures

Original compilation: Evan Gu, Wayne Zhang, Bixin Ventures

In early August, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) decided to add Tornado Cash to the sanctions list The news in has put the issue of censorship resistance under the spotlight. In order to avoid related criminal liability, RPC service providers Alchemy and Infura restricted access to Tornado Cash smart contract data, and Circle (USDC issuer) also blacklisted wallet addresses on the sanction list. Blacklisted addresses are also banned by Defi protocols such as Aave, but users can still interact with some smart contracts, although many additional steps and some technical expertise are required.

This brings us to a more general question: Can blockchain be censored at the protocol level? Concerns about protocol-level censorship have emerged in the Ethereum community, with 66% of Beacon Chain validators post-merger expressing sensitivity to OFAC regulations. If more than 1/3 of validators (weighted by stake) are censored in any way, the Ethereum chain will not function properly.

In this article, we will compare the performance of BTC (POW) and ETH (POS) in anti-censorship through three key questions, and finally give our thoughts.

Definition of "censorship"

On a recent Bankless podcast, Justin Drake defined two different types of censorship: weak and strong censorship

1. Weak censorship: Weak censorship occurs when certain censored block producers do not include individual transactions in blocks, resulting in a degraded user experience. For example, a compliant block producer rejects a transaction from a blacklisted address, but the transaction is still eventually accepted by a non-censoring block producer.

2. Strong censorship: when personal transactions will never be Strong censorship occurs when included on-chain. Given that the individual has lost the ability to trade, this situation can be considered to have effectively lost the asset. This can happen when the network is taken over by a majority, also known as a 51% attack, which could threaten the continued existence of the attacked blockchain.

In the following discussion, we will separate Bitcoin and Ethereum As a representative network of POW and POS systems for comparison. We will first identify what the elements of censorship are, and then detail how Bitcoin and Ethereum achieve censorship resistance.

Issue 1: When miners/block validators are concentrated, there may be weak regulation by jurisdiction

Censorship

Bitcoin and Ethereum both face separate Centralization of mining pools and verification nodes. This could create an attack where mining pools or validator nodes could be forced to comply with regulations and censor any transactions deemed illegal within their jurisdiction.

Ethereum

Since the merger, The top two pledge service providers together hold 43.03% of the shares, and the top three hold 51.63% of the shares. The risk here is that if Lido and Coinbase join forces, they can bring the network down; if Kraken joins, the three can take over the Ethereum network.

Source: Related Network

Before we examine how Ethereum responds to the threat of centralization, let’s first introduce why validators end up becoming centralized. Under Ethereum's POS mechanism, block producers can choose which transactions are included in the next block and how they are sequenced. This allows validators to participate in the process of MEV extraction, which Amber defined very well in their recent article on ETH mergers.

“Maximum Extractable Value, also known as MEV, broadly refers to the operations to obtain residual value over a series of blocks. These operations can include reordering transactions, censoring blocks, and even attempting to reorganize the blockchain. Some common forms of MEV include sandwich attacks, arbitrage, and liquidations.”

Source: Flashbots

As shown, validator rewards increase significantly once MEV is taken into account. Due to the economic incentives brought by MEV, larger players run more validators, eliminating individual and non-professional validators. Therefore, ordinary holders are more inclined to join the verification node pool through pledge services to obtain higher and more stable income, thereby increasing the centralization of verification nodes.

Another consideration regarding stake node centralization is cryptocurrency trading platforms. The trading platform is still the best place for users to obtain Ethereum Token. Considering the huge number of users they have, many Tokens will naturally gather on these trading platforms, and the convenient benefits provided by the trading platforms through their staking platforms will attract the gathering of Tokens. We should educate users about the risks of using centralized platforms for staking, such as the possible implications if centralized platforms may choose to act maliciously due to judicial pressure.

Although the validator pool is not the most ideal solution, it will allow more ETH holders to participate , so the equity pool is still conducive to the decentralization of Ethereum.

So, how does Ethereum respond to censorship about centralization?

Solution 1: Separate block proposers and builders

One solution that is getting a lot of attention is Proposer Builder Separation (PBS). PBS separates the roles of block proposer and block construction, so that validators can get rewards from MEV without being complex operators, thus reducing the centralization problem.

There are three key players in the operation of the blockchain, which can check and balance each other to mitigate and ultimately eliminate potential Review.

Builders, who specialize in building blocks, extract the maximum MEV and transaction fees by ordering transactions. Afterwards, they will pay Proposers a proposal fee and put their block on-chain. Therefore, without the help of the Proposer, those builders for review purposes will not be able to publish transactions on the chain.

Proposers, also known as validators, either choose the most popular block, or they don’t Will not contain a block. If they believe a block builder is censoring transactions, they have the ability to propose a censorship resistant list (crList) that builders must include as long as the block is not full, or their block is not proposed. Since EIP-1559 has been implemented, more than 80% of blocks contain spare gas, which means that as long as users pay a priority fee above the base fee, they should be able to have their transactions included in the block. In summary, Proposers can achieve the maximum benefit by choosing the block that pays the largest amount, but still have the ability to use crList to force through the review.

The prover will monitor the block building process and will only issue a block if the proposer's block contains the highest paying block Prove it. This will prevent malicious proposers from censoring transactions.

Although the above method greatly improves the decentralization of validators, it still does not solve the problem of builders centralization problem. How to decentralize builders is beyond the scope of this discussion, but you can read more about it here .

Solution 2: Encrypted Memory Pool

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Another solution being investigated is the use of encrypted mempools to combat centralized censorship. Users encrypt transactions before broadcasting them to the mempool, and decrypt them only after they are included in an on-chain block. This will prevent any potential censors from gaining access to the contents of transactions during block construction. Additionally, it helps prevent MEV abuse such as front-running. Another benefit of a cryptographic mempool is that it can actually solve builder centralization in the future. In this case, proposers can build their own blocks by picking the highest-fee transactions from an encrypted mempool, rather than picking blocks from complex builders.

Bitcoin

Bitcoin has always been known as "digital gold" ", this feature is not only reflected in its use as a digital value storage method, but also in its resistance to censorship. Although the Bitcoin network is not as programmable as Ethereum, and weaker programmability can minimize MEV, it still faces the problem of increasing geographical concentration of miners. In addition, operating a mining machine requires professional skills, and hardware and energy are also capital-intensive. The Bitcoin mining industry has developed in the direction of resource sharing. Miners pay service fees to mines according to unit computing power, thereby reducing income Cash flow pressure brought by investment.

Source: Cambridge Bitcoin Electricity Consumption Index

As the graph above shows, before China bans crypto mining in 2021, China accounts for more than 45% of the global hashrate. But the computing power has now shifted to the United States. As of January this year, the computing power of the United States has accounted for 38% of the global computing power. Mining companies may be compelled by local regulations to reject certain deals, posing a threat of scrutiny.

So, how does Bitcoin deal with the censorship issues brought about by the centralization of mining pools?

Solution 1: Switch mining pool

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Once a mining pool operator is subject to censorship regulations that are contrary to the interests of miners, miners can easily switch to other mining pools (for example, move away from the censored mining pool). Since the mode of purchasing computing power on demand is adopted, miners only need to change the address of the mining pool in the mining software to switch to a new mining pool. During 2021, when miners were banned by the Chinese government, miners were able to quickly migrate abroad and switch addresses to offshore mining pools, and the computing power has now recovered and is higher than before the ban was announced.

Although Ethereum can allow validators to withdraw or re-stake according to their will, due to the cooling period and There is still a time lag because of the queuing system.

Solution 2: Let miners have more control over the block building process< br>

Most Bitcoin miners direct their computing power to mining pools, where they use a messaging protocol called Stratum v1 to communicate with These mining pools communicate and the protocol organizes the creation and submission of hashes by miners. If mining pools collude to censor transactions, the community has no recourse. But with Stratum v2, miners will be able to choose their own transaction sets, giving them more control over the block-building process, which counters the censorship intent of malicious pool operators.

If you are interested in learning about Stratum v2 and its feature upgrades to improve miner safety and income , read here.

Solution Three: Free Market Competition

Bitcoin proponents believe that the proof-of-work mining economic incentive is the best form of resistance to any transaction censorship. As block rewards drop each halving cycle, transaction fees will tend to be 100% of miner revenue. So even if any regulatory compliant mining pool or miner scrutinizes paid transactions, other miners/pools in different jurisdictions will be more than happy to take advantage of this and steal the transaction. Ultimately, these compliant mining pools or miners will be defeated in the free market, causing their market share and profitability to decline.

Conclusion 1: Bitcoin can handle the centralization of the block creation process better than Ethereum Review questions.

Bitcoin today is much more capable of dealing with centralized censorship in the block building process. Miners can now switch pools without delay if there are pools that review certain transactions, greatly increasing miner autonomy.

While Ethereum has a viable solution to the censorship problem, it is mostly in the research phase and has not yet been implemented, Because there is competition with other programmable blockchains, other aspects of functionality need to be prioritized.

Question 2: If the security budget of the network is small, strong censorship risks may occur

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The impact of a small security budget is that it may lead to a 51% attack. When this happens, the attacker will be able to take control of the blockchain. They are able to block incoming transactions and are able to reorder new transactions. Even more serious is rewriting the history of the blockchain and reversing their own transactions, leading to double spending.

Ethereum's security budget

Once Launch a 51% attack on Ethereum, and all new deposits or withdrawals may be reviewed by the attacker, making it difficult for the network to recover. Therefore, the Token distribution in the network is decentralized as much as possible to prevent the required Token from being obtained through coercive means and attacks. At the time of writing, 13.6 million ETH is staked on the beacon chain. The economic security of Ethereum can be obtained by multiplying 13.6 million ETH by the price and multiplying by 51% to get the minimum amount required for transaction review. At the current price of $1,700 per ETH, that's about $11.5 billion in economic security today. In practice, the cost would be much higher, given that the price would rise non-linearly as demand for ETH increased.

Since taking out these funds is not a problem for some organizations or countries, we still need to consider preventive solutions.

Solution 1: Encourage more users to stake

Compared to other POS networks, only 11% of ETH is currently staked (e.g. 77% for Solana, 66% for Cosmos, 65% for Avalanche %), which means there is a lot of potential. As the stake increases, it becomes very difficult for an attacker to obtain 51% of the total stake.

However, one obstacle preventing more people from staking is the opportunity cost of DeFi benefits for users. If users can obtain better returns in DeFi, users may prioritize financial incentives, and the incentive effect of ETH pledged returns will be reduced. One of the solutions to break down the barrier is the liquid staking protocol, but this may also bring us back to the centralization problem we saw with Lido. While we can see that Lido is distributing stake to about 30 validators on its whitelist, the listing of this whitelist is still approved by Lido. Therefore, selection criteria and the ability to add and remove validators are critical, implying strong governance within DAOs.

Encouragingly, Lido has been exploring governance options using dual governance proposals, with key governance issues voted by Both stETH and LDO holders participate, which maintains consistency between both token holders. There is also a key issue related to censorship resistance, the potential to change the way stake is distributed among node operators in a potentially harmful or unintended way. In case-specific governance, once the initial proposal has been passed by LDO holders, stETH holders will also be involved, and they can also withdraw from the protocol if all available negotiations fail. Read here for a more detailed explanation of the voting mechanism and subsequent results.

Solution 2: Diversify validators to prevent coercion to gain governance rights

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If ETH cannot be obtained in the market, another way to gain control over the network is to forcefully win over 51% the verifier. Therefore, the censorship-resistant effect can be achieved by increasing the diversity of verifiers in the following form:

Increase diversity of jurisdictions/geography to ensure no single jurisdiction/country can take a validator offline

Increase operator/stakeholder Diversity to ensure that mandatory censorship is extremely difficult when stake is widely distributed

Increase client diversity to ensure validator clients No single bug in the end can take a validator offline

Reduced hardware requirements for participation to ensure everyone can start a validator as needed

Increase the number of validators with a complete copy of transactions

Solution 3: Societal Layer Intervention

If preventative measures fail, Ethereum Interventions will be carried out at the societal level. The specific content is to automatically execute the bifurcation process after the censorship is detected, and the system will reserve enough time for the bifurcation consensus to be reached. Ideally, a complete online node would check the memory pool to identify and identify which blockchains are censorship-oriented. Once found, they will fork and punish the censorship-purpose chains. None of these actions Intervention at the social level is required.

However, forks are rarely straightforward and quick, as censorship can sometimes be accidental, e.g. is due to a bug in the validator client. In this case, it is important to be able to intervene and discern what is real and what is accidental. In addition, there are some considerations, such as how to choose a new blockchain, which checkpoint should be taken to start the new blockchain, how to punish attackers on the new blockchain, etc., the handling of these issues will affect to the economic value of the chain. The above is to let new users understand that if they wish to participate in the new uncensored blockchain, they must first be able to withdraw funds on the chain. Although there are currently no rules and guidelines for users to understand how to respond to various policy interventions, it is very important that the governance and decision-making process of the chain should be as decentralized as possible.

Bitcoin Security Budget

If Bitcoin is subject to strong censorship, and miners will be able to mine all rewards and reorganize the chain as they see fit. Given the current hash rate of 230m TH/s, assuming that existing miners do not participate in the attack, an attacker can only control the network if they have a hash rate of more than 230m TH/s. Let's do the math, using the most efficient ASIC chip on the market today, the Antminer S19 PRO (110 TH/S), a total of 2.09 million ASIC chips (230,000,000 TH/s divided by 110 TH/s) are needed to carry out the attack. At today's price of $4,400, the total cost of acquiring the hardware to attack the network is $9 billion, before energy costs are factored in.

Solution  1: Bitcoin is more censorship resistant due to the difficulty of obtaining ASIC chips Sex

While the cost is not out of reach for some aggressive attackers, the acquisition There is a huge resistance when it comes to ASIC chips, because only a few companies can produce these ASIC chips. And since there is not enough supply coming online every year, attackers cannot launch quick attacks.

Solution  2: The conversion rate of miners is very low leading to the decentralization of the Bitcoin network

It is very difficult to obtain the machines needed to control the network, so attacks are likely to be There are mining pools to achieve this. We can solve this problem by relying on the mining pools emerging in different regions of the world, because their emergence greatly reduces the switching cost of miners, making it possible to switch quickly when facing censorship, thus achieving censorship resistance.

Conclusion 2: Bitcoin is more resilient than Ethereum in preventing strong 51% censorship attacks . Ethereum's solution of using the social layer as the last line of defense provides more power to the few, but there are still many problems with social consensus.

On the face of it, Ethereum has a higher security budget than Bitcoin. However, acquiring hardware in taking over the Bitcoin network is more of a hindrance than the cost of acquiring an Ethereum majority.

Bitcoin's solution is much simpler if an attacker takes an alternative route to a strongly censored centralized mining pool to gain control of the network, because Honest miners can help rebalance the hashrate by switching to non-aggressive pools.  

In the case of strong censorship of Ethereum, although the social layer can intervene, how to transition There are still many issues with the soft fork to user activation. First, how can social consensus be achieved among non-attack participants? Can a majority of the new minority make a decision? Or is it up to the core team to decide? The decision-making process can be compared to "Ethereum DAO" voting to reach a majority decision. So should it be decided by a majority of voters or a majority stake? A common criticism in DAO voting is that a large majority of holders can vote for an outcome, only to be overruled by a single holder with a larger stake. This is not intended to reflect the actual process by which fork rules are determined, but rather to highlight problematic aspects of social governance that the Ethereum community has yet to implement. In the end, it may be that as Nic Carter  said, the social consensus layer inevitably leaves room for politicization, and Ethereum may suffer the same fate as the expropriating national government.

So we think bitcoin is more resilient. It's also worth noting that this may not be the case in the future. One potential scenario is that if Bitcoin’s transaction activity fails to pick up as block rewards approach zero, the lack of transactions will result in a lack of revenue for miners who may struggle to remain solvent. This would cause miners to shut down their rigs and cause the hash rate to drop, weakening Bitcoin’s security budget. So, the Bitcoin network needs to continue to attract new users, only then it can function as a healthy network.

Question 3: External dependencies may pose a censorship risk to the underlying network

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Stablecoins

The denomination of each cryptocurrency is anchored using stablecoins, Bitcoin and Ethereum No exception. Taking a quick look at the market cap of stablecoins, we can see that the top 3 are all backed by fiat collateral held by centralized custodians. This puts them in the realm of regulation, which begs the question: what if custodians make it impossible for users to convert stablecoins to fiat simply because of government censorship or prohibition? While these are unlikely to happen, the knock-on effects are dire. Not long ago, USDC issuer Circle froze funds worth more than 75,000 USDC associated with Tornado Cash addresses in accordance with the OFAC sanctions list.