[Bitcoin-development] Defeating the block withholding attack

[Luke-Jr]

Analysis, comments, constructive criticism, etc welcome for the following:

==Background==
At present, an attacker can harm a pool by intentionally NOT submitting shares 
that are also valid blocks. All pools are vulnerable to this attack, whether 
centralized or decentralized and regardless of reward system used. The 
attack's effectiveness is proportional to ratio of the attacker's hashrate to 
the rest of the pool.

There are obvious solutions that can be used to defeat this attack on 
centralized pools. For example, including a secret in the coinbase transaction 
that is accepted by the network as a partial preimage proof-of-work. All these 
solutions require changes to Bitcoin's proof-of-work acceptance terms, and 
since centralized pools can be harmful to the network's security, these rule 
changes are not likely to gain enough acceptance among the greater Bitcoin 
community.

==Proposed Solution==
Please comment on the viability of this new proof-of-work algorithm, which I 
think should be viable for even decentralized pools:

Blocks are accepted at a lower difficulty N (choosable by the pool; eg, the 
share difficulty) iff they are submitted with a candidate for the next block 
and SHA256(SHA256(NewBlockHash + NextBlockCandidateHash)) meets difficulty M.
The relationship between M and N must be comparable to the normal network 
difficulty; details on the specifics of this can be figured out later, ideally 
by someone more qualified than me. M and N must be chosen prior to searching 
for the block: it should be safe to steal some always-zero bytes from the 
prevblock header for this.

This algorithm should guarantee that every share has an equal chance of being 
a valid block at the time it is found, and that which ones are actually blocks 
cannot be known until the subsequent block is found. Thus, attackers have no 
way to identify which shares to withhold even while they have full knowledge 
of the shares/blocks themselves.

==Backward Compatibility==
Obviously, this change creates a hard-fork in the blockchain. I propose that 
if it solves the block withholding risk, the gain is sufficient that the 
community may approve a hard-fork to take place 1-2 years from consensus.

Since mining continues to use a double-SHA256 on a fixed 80 byte header, 
existing miners, FPGAs, etc should work unmodified. Poolservers will need to 
adapt significantly.