Is a Black Swan Event Coming for the Blockchain?


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Only three months into 2022 and the cryptocurrency industry continues to dominate headlines. From a brilliant display of creativity at the “Crypto Bowl” to President Biden’s executive order directing the Treasury Department to study the impact of cryptocurrency on financial stability and national security, it’s only becoming more apparent that crypto has moved from a fringe technology to a mainstream industry that continues to disrupt the status quo.

Perhaps most notably is its involvement in the war in Ukraine, with the Ukrainian government receiving more than $22 million worth of digital assets from cryptocurrency investors nearly overnight – ushering in a whole new series of questions about the industry’s role in the midst of a geopolitical and humanitarian crisis. Under increased scrutiny, the crypto community has had to wrestle with accusations that it could become a tool for sanctions evasion by Russian businesses and government officials.

The war in Ukraine, however, is only the tip of the iceberg for understanding both the short and long term impact that geopolitical issues can have on the industry, and on the Blockchain in particular. In fact, while the Blockchain has come to be viewed as nearly untouchable due to its decentralized nature and anti-authority stance, its stability is probably a bit more fragile than most people think.

“A lot of people think that the government can’t shut down Bitcoin or cryptocurrency,” said Kyle Sidles, Co-Founder and CEO of MineCheck, a NH-based company offering proprietary software for the cryptocurrency mining industry. “But in reality, if they were to just restrict internet access, it could lead to a black swan event for the blockchain.”

We’re already seeing some of this play out in Ukraine. Russia’s continued assaults on cities have left parts of the country with internet outages and their major telecom providers have been subject to repeated hacking and cyberattacks. In fact, if it weren’t for Ukraine’s “Hidden Heroes” and Elon Musk’s prompt response to requests for help by Mykhailo Fedorov, Ukraine’s Vice Prime Minister and Minister of Digital Transformation, Ukraine would likely be off the grid (at one point, Musk’s Starlink was the “only non-Russian communications system still working in some parts of Ukraine”, he tweeted).

A disruption in internet connectivity threatens the blockchain because it relies on constant connection in order to function properly, explains Sidles. It is especially important to areas that are contributing the most to it. While Ukraine has a small share of mining operations, its neighboring country to the east, Kazakhstan, holds the second largest share of the global hashrate (18.1 percent), a measure of computational resources used to conduct mining activities and secure the blockchain.

Kazakhstan hasn’t always held this large a share, but the bitcoin mining landscape shifted significantly in September 2021, when China – which dominated the market with 75.5 percent of the hashrate – issued a ban on all crypto activities, forcing miners to scramble for a new home. Since then, the U.S. now accounts for 35.4 percent of the global hashrate, more than double the 16.8 percent it had at the end of April 2021. Kazakhstan and Russia now follow the U.S. with hashrate shares of 18.1 percent and 11 percent, respectively, up from 8.2 percent and 6.8 percent in April, according to a report from Cambridge Centre for Alternative Finance (CCAF). Meanwhile, mining operations in China have effectively dropped to zero.

As the second and third largest mining hubs in the world, ensuring Kazakhstan and Russia stay online is of great importance to keeping the blockchain network secure. Kazakhstan itself already faced disruptions earlier this year, when protests over a hike in fuel prices led to the death of over 160 people and a “nation-scale internet blackout” for five days, which effectively knocked out Bitcoin miners in the country and resulted in a 13.4 percent drop in the global hashrate.

“The concern is that things that don’t really have to do with mining are impacting, or are having the ability to impact, areas with a high concentration of miners,” said Sidles. “We like to think that Bitcoin is impenetrable, but disruptions in internet connectivity caused by geopolitical volatility poses the question of just how secure it is.”

Sidles questions what would happen, for instance, if there were prolonged internet disruptions – either high latency or complete regional disruptions – in areas that have high contributions to the hashrate for the blockchain.

“There is a concept called a fork,” he explains. “That’s when you get two separate chains or two separate copies on the Blockchain that are not identical.” This could be caused by a software update, where half of the network updates to a new version and the other half doesn’t, thereby preventing the half that wasn’t updated from participating in the updated network.

Or it could happen at a much larger scale if, for example, World War III breaks out and a country restricts internet and communication access to the outside world – something that is seemingly happening in Russia right now. Indeed, in a feverish attempt to silo Russian citizens from outside sources, Putin is working to impose what’s being called a “digital Iron curtain.” And just last week, two of Russia’s biggest transit providers – Lumen Technologies and Cogent Communications – discontinued their service. Currently, however, there are no reports of miners being directly affected by the war in Ukraine, and network metrics show that connectivity in Russia continues as it has historically.

Researchers from network intelligence firm ThousandEyes wrote in a statement: “Much has been speculated recently about [Cogent and Lumen’s] potential role in disconnecting Russia from the rest of the global internet. However, Russia’s connection to the rest of the world via these vital networks remains intact, with major Russian ISPs, such as JSC Rostelecom, continuing to peer with global transit providers outside of Russia, just as they did before recent events.”

The black swan event, Sidles notes, would be if there was a major disruption to Bitcoin mining in Russia – or any one of the countries that have a large share of the hashrate. He explained that even if the country that was shut off from the rest of the world continues mining, they would be the only ones working on that blockchain. And with the rest of the world still transacting, it would cause “forking” to occur, creating two separate copies that have gotten out of sync.

“This means that one of those chains in the future would become the primary chain,” he said. “There’s not really an easy way to come back from that once that’s happened.”

To further illustrate this point, Sidles gives the example of person A paying person B on one country’s copy of the blockchain. The rest of the world would show that transaction as never having existed. “So, if the internet or communication was restored and that country wanted to jump back onto the primary chain, the only way it would be possible is to undo all the transactions that occurred at that time.”

So far, the blockchain network remains stable. The global bitcoin hashrate has been nearly unchanged three weeks into the war in Ukraine. But questions about the future of mining and internet disruption abound, especially as the industry faces regulatory uncertainty. About a week before the war started, the Russian Ministry of Finance submitted a bill that would regulate crypto trading and mining to the parliament. And last month, Kazakhstan authorities started discussing significant tax increases for miners.

As the U.S. offers a safe and more stable jurisdiction, the influx of miners that began last fall likely came at a good time. While much remains to be seen, the one thing the mining community has taught us through geopolitical unrest, increased scrutiny, regulatory uncertainties and more, is that they are nothing if not resilient.