Censorship Resistance in Bitcoin and Ethereum

Original title: “Censorship resistance in Bitcoin and Ethereum”

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

Original translation: Evan Gu, Wayne Zhang, Bixin Ventures

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

This brings us to a more general question: can blockchains be censored at the protocol level? Concerns about protocol-level censorship have emerged in the Ethereum community, with 66% of beacon chain validators expressing sensitivity to OFAC regulations post-merger. If more than 1/3 of validators (by stake weight) 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 censorship resistance through three key questions, and finally give our thoughts.

Definition of “censorship”

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

1. Weak censorship: Weak censorship occurs when some censored block producers do not include individual transactions in the block, 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-censorship block producer.

2. Strong censorship: Strong censorship occurs when an individual’s transactions are never included on-chain. Given that the individual has lost the ability to trade, this situation can assume that the asset has actually been lost. This situation can occur when the network is overtaken 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 compare Bitcoin and Ethereum as representative networks for POW and POS systems, respectively. We’ll first identify what censorship elements are, and then go into detail about how Bitcoin and Ethereum achieve censorship resistance.

Issue 1: When miners/block validators are relatively centralized, weak censorship through jurisdictional regulation may occur

Both Bitcoin and Ethereum face the problem of centralization of mining pools and validators, respectively. This could create a way of attack whereby 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 hold a combined 43.03% share, and the top three hold 51.63% share. The risk here is that if Lido and Coinbase join forces, they can bring the network to a standstill; if Kraken joins, the three can overtake the Ethereum network.

Censorship Resistance in Bitcoin and Ethereum

Source: Related Network

Before looking at how Ethereum responds to the threat of centralization, let’s first introduce why validators will eventually become centralized. Under Ethereum’s POS mechanism, block producers can choose which transactions are included in the next block and how they are ordered subsequently. This allows validators to participate in the process of MEV withdrawals, which Amber defines well in their recent article on ETH mergers.

“Maximum Extractable Value, also known as MEV, is broadly defined as the amount of remaining value a miner or validator earns in a series of blocks given available operations. These operations can include reordering transactions, censoring blocks, or even Try restructuring the blockchain. Some common forms of MEV include sandwich attacks, arbitrage, and liquidations.”

Censorship Resistance in Bitcoin and Ethereum

Source: Flashbots

As shown, the validator reward increases significantly once MEV is considered. Due to the economic incentives brought by MEV, larger participants run more validators, thereby eliminating individual and non-professional validators. Therefore, ordinary holders are more inclined to join the verification node mining pool through staking services to obtain higher and more stable income, thereby increasing the centralization of verification nodes.

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

Although validator pools are not the most ideal solution, they allow more ETH holders to participate, so stake pools are still good for Ethereum’s decentralization.

So, how does Ethereum respond to scrutiny around centralization?

Solution 1: Separate block proposers and builders

One solution that is getting a lot of attention right now is Proposer Builder Separation (PBS). PBS separates the roles of block proposer and block construction, so that validators can be rewarded with MEVs without being complex operators, thus mitigating 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 censorship.

Builders who are specialized in building blocks extract maximum MEV and transaction fees by ordering transactions. After that, they will pay Proposers a proposal fee and put their block on-chain. Therefore, builders with censorship purposes will not be able to publish transactions on-chain without the help of the Proposer.

Proposers, also known as validators, either choose the hottest block, or they won’t include a block at all. They have the ability to propose a censorship resistant list (crList) if they believe the block builder is censoring transactions, which the builder must include as long as the block is not full, or their block has not been proposed. Since EIP-1559 has been implemented, over 80% of blocks include backup gas, which means users should be able to include their transactions in blocks as long as they pay a priority fee above the base fee. In summary, Proposers can achieve the maximum benefit by choosing the block that pays the maximum amount, but still have the ability to use crList to force censorship.

The prover will monitor the block construction process and will only prove it if the proposer’s block contains the highest paying block. This will prevent malicious proposers from censoring transactions.

While the above approach greatly improves the decentralization of validators, it still does not address the centralization of builders. How to decentralize builders is beyond the scope of this discussion, but you can read more here.

Solution 2: Cryptocurrency mempool

Another solution under study is the adoption of cryptocurrency mempools to counter centralized censorship. Users encrypt transactions before broadcasting them to the mempool, and only decrypt them after they are included in a block on the chain. This will prevent any potential censors from gaining access to the contents of the transaction during the block construction process. Additionally, it helps prevent MEV abuse, such as front-running. Another benefit of a cryptocurrency mempool is that it can actually solve the problem of centralization of builders in the future. In this case, proposers can build their own blocks by picking the highest-fee transactions from the cryptocurrency mempool without picking blocks from sophisticated builders.

bitcoin

Bitcoin has always been hailed as “Crypto gold”, not only in its use as a Crypto store of value, but also in its censorship resistance. While the Bitcoin network is not as programmable as Ethereum, and weaker programmability can minimize MEV, it still faces the problem of the increasing geographic concentration of miners. In addition, professional skills are required to operate mining machines, 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 the mining farms based on unit computing power, thereby reducing the cost of Cash flow pressures from investments.

Censorship Resistance in Bitcoin and Ethereum

Source: Cambridge Bitcoin Electricity Consumption Index

As the chart above shows, before China banned cryptocurrency mining in 2021, China accounted for more than 45% of the world’s computing power. However, the computing power has now turned 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 censorship.

So, how does Bitcoin deal with the censorship issues that come with the centralization of mining pools?

Solution 1: Switch mining pools

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

While Ethereum can have validators revoke or re-stake at their will, there is still a time lag due to the cooldown and queuing system.

Solution 2: Let miners have more control over the block construction process

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

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

Solution 3: Free Market Competition

Proponents of Bitcoin argue that proof-of-work mining economic incentives are the best form of resistance to any transaction censorship. Transaction fees will trend towards 100% of miners’ revenue as block rewards fall with each halving cycle. So even if any regulatory compliant mining pool or miner censors paid transactions, other miners/pools in different jurisdictions will be more than happy to take advantage of this to steal transactions. 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 censorship issues due to centralization in the block creation process better than Ethereum.

Bitcoin today is better able to handle the centralized censorship of block construction. If there is a mining pool that censors certain transactions, miners can now switch mining pools without delay, and the autonomy of miners is greatly improved.

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

Issue 2: Strong censorship risk may occur if the network has a small security budget

The impact of a small security budget is that it can 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 they are able to reorder new transactions. Even more serious is rewriting the history of the blockchain and undoing their own transactions, resulting in double spending.

Ethereum’s Security Budget

Once a 51% attack on Ethereum is launched, all new deposits or withdrawals may be censored by the attacker, at which point it will be difficult for the network to recover. Therefore, the distribution of Tokens in the network should be as decentralized as possible to prevent obtaining the required Tokens through coercive means and conducting attacks. At the time of writing, 13.6 million ETH is staked on the beacon chain. The economic security of Ethereum can be calculated by multiplying 13.6 million ETH by the price and multiplying it by 51% to arrive at the minimum amount required to conduct a transaction review. At the current price of $1,700 per ETH, today’s economic security is about $11.5 billion. In reality, the cost would be much higher given that the price would rise nonlinearly as demand for ETH increases.

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 (eg Solana 77%, Cosmos 66%, Avalanche 65%), which means there is a lot of potential. As the stake increases, it will be 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 get better returns in DeFi, users may prioritize financial incentives, and the incentive effect of ETH staking income will be reduced. One of the solutions to breaking the barrier is a liquid staking protocol, but this may also bring us back to the centralization problem we saw in Lido. While we can see that Lido is distributing stake to about 30 validators on its whitelist, this whitelisted list is still approved by Lido. Therefore, the selection criteria and ability to add and remove validators are critical, which means strong governance is required within DAOs.

Encouragingly, Lido has been exploring governance solutions using dual governance proposals, where voting on key governance issues will be shared by stETH and LDO holders, which maintains consistency between holders of both types of tokens. There is also a key issue related to censorship resistance, the potential to change the way stakes are distributed among node operators in a potentially harmful or unexpected way. When it comes to governance in specific cases, once LDO holders have passed the initial proposal, stETH holders will also be involved, and they can also withdraw from the protocol if all available negotiation fails. Read here for a more detailed explanation of the voting mechanism and subsequent results.

Solution 2: Validator diversification to prevent coercion to gain governance

If ETH cannot be obtained in the market, another way to gain control of the network is to force 51% of the validators. Therefore, the effect of censorship resistance is achieved by increasing the diversification of validators in the following forms:

Increase jurisdiction/geographic diversity to ensure that no single jurisdiction/country can take validators offline

Increase operator/stakeholder diversity to ensure that mandatory scrutiny is extremely difficult when stakes are widely distributed

Improve client diversity to ensure that no single bug in the validator client can take the validator offline

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

Increase the number of validators with full transaction copies

Solution 3: Social Layer Intervention

If preventive measures fail, Ethereum will intervene through the social dimension. The specific content is to automatically execute the fork process after censorship is detected, and the system will reserve enough time for the fork consensus to be reached. Ideally, a full online node would check the mempool to identify and identify which blockchains are censorship-purposed and, if found, fork and penalize censorship-purposed chains, all of which No social intervention is required.

However, forks are rarely straightforward and quick, as censorship can sometimes be accidental, such as 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 considerations such as how to choose a new blockchain, which checkpoint should be taken to start a 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 a 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 deal with various policy interventions, it is important that the governance and decision-making process of the chain should be as decentralized as possible.

Bitcoin’s Security Budget

If Bitcoin is subject to strong censorship, 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 existing miners do not participate in the attack, an attacker can only take control of the network if they have more than 230m TH/s of computing power. Let’s do the math, using the most efficient ASIC chip on the market today, the Antminer S19 PRO (110 TH/S), requires a total of 2.09 million ASIC chips (230,000,000 TH/s divided by 110 TH/s) to attack. At today’s price of $4,400, the total cost of acquiring the hardware to attack the network, excluding energy costs, is $9 billion.

Solution 1: The Bitcoin network is more censorship-resistant due to difficult access to ASIC chips

While the cost is not out of reach for some hard-hitting attackers, there is huge resistance to acquiring ASIC chips because only a few companies can produce them. And because there is not enough supply coming online every year, attackers cannot launch a quick attack.

Solution 2: Low miners’ conversion leads to decentralization of the Bitcoin network

Getting the machines needed to control the network is very difficult, so the attack is likely to happen by coercing or controlling existing mining pools. We can solve this problem by relying on mining pools that appear in different regions of the world, because their appearance greatly reduces the switching cost of miners, making it possible to switch quickly in the face of censorship, thereby achieving censorship resistance.

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

On the surface, Ethereum has a higher security budget than Bitcoin. However, the acquisition of hardware in overtaking the Bitcoin network creates more resistance than the cost of acquiring the Ethereum majority token.

If attackers take an alternative route to strong censorship of centralized mining pools to gain control of the network, Bitcoin’s solution is much simpler, as honest miners can help rebalance the hash rate by switching to non-aggressive mining pools.

With Ethereum under strong censorship, while the social layer can intervene, many questions remain about how to transition to a user-activated soft fork. First, how can social consensus be reached among non-aggressive actors? Will the majority of the new minority make a decision? Or is it up to the core team to decide? The decision-making process can be likened to voting in an “Ethereum DAO” to reach a majority decision. So should it be decided by a majority of voters or a majority stake? A common criticism of DAO voting is that an overwhelming majority of holders can vote for an outcome that is ultimately overruled by a single holder holding more shares. This is not meant to reflect the actual process of deciding the rules of the fork, but to highlight the problematic aspects of social governance that the Ethereum community has not yet implemented. Ultimately, as Nic Carter said, the social consensus layer inevitably leaves room for politicization, and Ethereum could suffer the same fate as an expropriating national government.

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

Problem 3: External dependencies may create censorship risks for the underlying network stablecoins

Every crypto denomination is backed by a stablecoin, and Bitcoin and Ethereum are 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 within the purview of regulation, which begs the question: what do we do if custodians prevent users from converting stablecoins to fiat simply because of government censorship or prohibition? While these are unlikely to happen, the chain reaction that would result when they did would be dire. Not long ago, USDC issuer Circle froze funds worth more than 75,000 USDC associated with Tornado Cash addresses in accordance with OFAC sanctions list.

Censorship Resistance in Bitcoin and Ethereum

Potential Solution 1: Overcollateralized Stablecoins

One can mint a token pegged to fiat currency in exchange for cryptocurrency collateral. MakerDAO’s DAI is currently the largest decentralized stablecoin in the cryptocurrency space, and they maintain the 1 DAI = $1 peg by liquidating pledged cryptocurrency collateral when asset prices start to fall. Since 2017, they have experienced the price volatility of Bitcoin and Ethereum and have proven to be robust. However, even they have over 30% USDC exposure as part of their collateral. Following the recent events of USDC and Tornado cash, they are currently in governance discussions on whether DAI needs to be more freely circulated by implementing negative interest rates in order to achieve their vision of becoming a public, neutral financial utility infrastructure.

Another option favored by Vitalik is Reflexer’s RAI. In this protocol, users can deposit ETH and mint RAI, up to the value of the deposited ETH. The main difference here is that the RAI does not stick to a fixed peg like the USD, which means that the peg of the RAI changes according to market volatility. They also allow for negative interest rates, which helps provide a balance where excessive growth can be contained, making stablecoins less volatile. Read here for a more detailed explanation of how RAI works.

However, a fundamental problem with over-collateralized stablecoins is that they continuously extract liquidity from the market (which is not ideal if we expect financial activity to take place in cryptocurrencies). We also consider which collateral can be pledged as the base currency.

Bitcoin Viability: Bitcoin is pretty much the best collateral right now. But even though there are currently ready solutions in the market, which will draw liquidity from the market due to over-collateralization, this is not an ideal solution if we expect financial activity to happen on-chain.

Ethereum viability: Stablecoins using ETH as collateral may not be the way forward. If ETH faces censorship, these stablecoins will face redemption issues as users may want to exit their ETH positions. While using Bitcoin as collateral mitigates this associated risk, it still faces liquidity withdrawal issues.

Potential Solution 2: Algorithmic Stablecoins

Algorithmic stablecoins are an alternative, although the Luna crash gave them a bit of notoriety. The goal of algorithmic stablecoins is to create a pegged stablecoin that requires no collateral, but instead uses some form of governance token for anchoring Certainly. It is then pegged through arbitrage opportunities between governance tokens and algorithmic stablecoins. But this system design is very fragile because it requires rational participants and firm confidence in the value of governance tokens.

Censorship Resistance in Bitcoin and Ethereum

Once confidence is broken, a death spiral may appear: when the price of governance tokens falls, instead of maintaining the stability of token prices, market participants further sell off the governance tokens they hold, aggravating the price drop.

In theory, algorithmic stablecoins could perform the same role as parts of our existing banking system without withdrawing liquidity. But there seems to be no suitable candidate project to perfect the system design of algorithmic stablecoins, making them less risky.

Bitcoin Viability: Not applicable, there are no viable candidates in the market.

Ethereum Viability: Not applicable, there are no viable candidates in the market.

Potential Solution 3: Bitcoin or Ethereum as a Decentralized Stablecoin

Thinking: What if Bitcoin became an uncensored decentralized “stablecoin”? This seems to solve the problems faced by Bitcoin and Ethereum.

Bitcoin Viability: It seems that all Bitcoin holders can join because 1 BTC = 1 BTC. This might solve the situation where security budgets are falling due to lack of transaction activity (to recap: block rewards tend to zero = all miner income depends on transaction fees = sufficient transaction activity is needed to stay solvent and keep hashrate high) . If BTC is widely used on Ethereum (and any other programmable blockchain), transaction activity will come from its use as a base layer currency for DeFi and many other applications, which can then maintain economic incentives for miners, further strengthening resistance to any attack censorship resistance.

Feasibility of Ethereum: Imagine if USDC or USDT were censored and the chain forked, and there was no stablecoin pegged to fiat currency on the chain, how many users would choose the stablecoin with “bubble and low transaction volume” ? If Ethereum were to be used as a decentralized stablecoin, it would remove the reliance on fiat-pegged stablecoins, making chain forks a more realistic option in the face of powerful censorship attacks. Users will not have to worry about the destruction of economic value because Ethereum as a base layer currency has strong censorship-resistant properties.

RPC network

The RPC (Remote Procedure Call) network is essential to the blockchain. It provides access to server nodes and allows users to communicate and interact with the blockchain while interacting with some independent program. Given the specific hardware required to run these RPC nodes, most developers turn to centralized RPC networks such as Infura and Alchemy for their dApp API needs. The downside is that these centralized RPC networks can restrict access to blockchain data subject to compliance with any governing law, and can also act as a central point of failure that is vulnerable to hacking. The end result is that users may face service interruptions that greatly degrade the user experience.

Solution 1: Light Client

Ethereum has been wanting more users to run their own light clients. Light clients do not store the full state history of the chain, but rely on the synchronization committee to sync to the chain. They can also make arbitrary queries about the state of the network by asking other full nodes rather than centralized Infura or Alchemy.

Bitcoin has also always encouraged users to run their own light clients. Light clients on Bitcoin can interact with the network but not store the blockchain, and can query other nodes for block and transaction data of interest.

Solution 2: Decentralized RPC Network

Decentralized RPC network providers provide economic incentives for distributed RPC nodes to provide applications and users access to blockchain data. By using a decentralized set of RPC nodes, the underlying protocol layer can enhance its security and censorship resistance as there is no single point of failure. Existing solutions include Pocket Network, Ankr, and Solana’s GenesysGo. Both Ethereum and Bitcoin would benefit from a decentralized RPC layer, which would improve Ethereum’s censorship resistance given the large number of applications using the RPC network.

Core developers and project teams

The arrest of Alexey Pertsev, the founder of Tornado Cash, has sparked debate on whether developers or project teams can be held accountable for their open source code. So should they be anonymous? Easily identifiable identities put individuals under jurisdiction, which can mean they are vulnerable to regulatory control. While there is no explicit requirement that founders or developers be held accountable for their code, it may be wise to ensure teams are geographically distributed to deal with any potential scrutiny from a particular jurisdiction.

Conclusion 3: External dependencies have a significant impact on the censorship-resistant aspects of base-layer protocols.

We believe that the first issue to be addressed is the choice of base layer currency, the economic value of both Bitcoin and Ethereum are pegged to USDC and USDT which are susceptible to U.S. regulations. For other possible sources of censorship risk include the RPC layer and protocol developers, we believe existing solutions can mitigate and ultimately eliminate these issues.

Epilogue

Although we have extensively compared Bitcoin and Ethereum, they also have their own characteristics and solutions in terms of censorship resistance, such as Bitcoin’s characteristics that make it suitable for base layer currencies, we still need to be like Ethereum The programmability of the blockchain is required to have on-chain applications. Ultimately, decentralization, censorship resistance, and sovereign independence are what Bitcoin, Ethereum, and many other blockchains are striving to achieve.

This article is from a submission and does not represent the views of BlockBeats.

Rhythm BlockBeats reminds that according to the document “Reminder on the Risk of Preventing Illegal Fund Raising in the Name of “Virtual Currency” and “Blockchain”” issued by the China Banking and Insurance Regulatory Commission and other five departments in August 2018, the general public is requested to view the blockchain rationally and not Blindly believe in hype promises, establish correct currency concepts and investment concepts, and effectively improve risk awareness; actively report to relevant departments for clues to illegal and criminal activities found.

Source of information: Collected from the Internet by 0x information.The copyright belongs to the author “BlockBeats”, and may not be reproduced without permission

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