In-depth analysis of the Binance theft incident: Block reorganization, the only beneficiaries are miners!

Differences

A simple model

This is the easiest scenario to analyze. We assume that Binance has contacted every mining pool (although this is unlikely), and reached an agreement on the compensation amount for each miner (although some miners may agree, others are unlikely to agree), and reached consensus. We assume that no one disagrees at this time (although this is extremely unlikely), and no one will set up a backup mining pool to continue mining the current longer main chain.

First, let’s look at what is a reasonable amount to compensate miners. Assuming a miner has 10% of the network’s computing power, and 100 blocks need to be reorganized after the attack, this means that the miner will have to give up the rewards for the 10 blocks he has mined on the original chain (i.e. 100*10%=10) and the corresponding transaction fees, that is, giving up 125 BTC (i.e. 10*12.5=125) and the corresponding block transaction fees.

(Note: Block reorganization (reorg) is also known as transaction rollback. As long as there is more than 51% computing power, a new fork will be mined before the stolen coin transaction block, and only the stolen transaction (and subsequent transactions) will be removed, and other transactions on the original chain will be packaged normally. Then, when the length of the new fork exceeds the original stolen chain, block reorganization will occur. Reorganization can be simply understood as: the new fork covers the original stolen chain, and the effect is: without affecting other transactions, the stolen coin transaction is rolled back alone.)

You might think that the miner will be able to mine on the reorganized chain and get about 10% of the block rewards, which can offset this, but this is not the case . Because during the period of block reorganization, the miner could have continued to mine on the original main chain with his own computing power and get 10% of the block rewards (and transaction fees), without giving up the rewards (and transaction fees) of the 10 blocks that had been mined on the original chain. This means that the miner will lose at least 125 BTC by helping Binance with block reorganization.

Therefore, the miners who help Binance reorganize will ask Binance to compensate them for the rewards (and transaction fees) of the blocks that these miners have already mined on the original chain. In this scenario, assuming that each block has a fee of 0.5 BTC, a total of 130 BTC (i.e. 125 + 0.5*10=130) needs to be compensated to the miner with 10% of the computing power.

That’s not all! There is also a risk premium in case something goes wrong. If no one else is willing to use Binance’s new reorg chain except this miner with 10% of the hashrate, then that miner’s hashrate is wasted that could have been used to mine the original chain.

If the reorganization effort is unsuccessful, Binance will have to agree to either compensate for this premium risk or take the loss of wasted hashrate. This will be a significant portion of the compensation, but for the sake of keeping this article short and to the point, we will ignore this aspect for now.

Therefore, if Binance starts trying to reorganize 100 blocks after the theft, they will have to pay a cost of 1,300 BTC (i.e. 100*12.5+100*0.5=1,300, where 12.5 is the block reward of the Bitcoin chain and 0.5 is the transaction fee that miners can get after each block is mined) to recover the stolen 7,000 BTC, which means that Binance can recover 5,700 BTC. From Binance's perspective, you can think of this as an ideal scenario because they can recover a large amount of money.

What are the consequences of this scenario? Most obviously, something like this would prove that Bitcoin is centralized, because if Binance can force a reorganization of those 100 blocks, any other sufficiently powerful entity could do the same.

This will lead to many double spending attempts, and anyone who transacted during those 100 blocks will have to scramble to figure out what happened. In fact, there is a chance that a larger double spending problem than the current 7,000 BTC lost could occur through the reorg! This will cause major disruption to everyone transacting on the Bitcoin network, as no one will accept 3-6 confirmations given what Binance could have done.

In other words, exchanges, merchants, and users will have to endure at least a big headache, and at worse, deal with more pain to deal with possible double spending problems.

Wait, we haven’t even talked about what a thief (hacker) would do yet!

Therefore, a restructuring scenario is highly unlikely, as all those who would experience pain in such a scenario would resist it.

A more controversial choice

Even if you have 99% of the computing power, you still need to mine 101 blocks on the new chain (about 20 hours). (Note: The current Bitcoin chain mines a block every 10 minutes on average, so 101 blocks will take about 20 hours)

In this case, both the original main chain and the reorganized new chain hope to attract each other's miners. The original main chain has an advantage because it is 100 blocks ahead when the competition begins.

The original main chain is supported by many exchanges, merchants, and users who do not want to reorganize these 100 blocks. They are likely to compensate the miners on the original main chain. They can easily compensate the miners: spend a UTXO (unused transaction output) on the original main chain with a high fee, and this UTXO is only valid on the original main chain. If the fee is high enough, many miners will be tempted to switch to mining on the original main chain.

It should be pointed out here that there is a special user on the original main chain - the hacker who launched the attack. He may also initiate similar transactions (UTXO involving stolen transactions) to compensate miners through higher fees on the original main chain.

On the other side of the equation is Binance, which has to contend with all of these exchanges, merchants, and users, not to mention the hackers who launched the attacks.

The hacker has already stolen 7,000 BTC from Binance, so the hacker can use all of this amount to incentivize miners to continue mining on the original main chain and organize block reorganization.

By contrast, Binance would have to spend 1,300 BTC + the amount the hacker was willing to spend to prevent the reorg + the amount other exchanges/merchants/users were willing to spend to prevent the reorg. This is clearly a losing battle. Unless Binance thinks it’s worth spending 1,300 BTC to punish the hacker (or 13 BTC * number of confirmations of the stolen transaction), the reorg is not in Binance’s favor.

Just like a protracted lawsuit is really only good for the lawyers, the only people who benefit in a block reorganization scheme are the miners. The money went to the miners through controversial transactions (from Binance or hackers). Deep down, this is how the Bitcoin protocol was designed, and it is very expensive to change it.

There is a reason why people don’t attempt reorganizations, even after massive thefts. Reorganizations hurt not only the theft perpetrators, but everyone else as well. There is a huge collective incentive not to change Bitcoin’s transaction history.