[Bitcoin-development] Cloud mining should be using merkle sum trees to prove they aren't doing fractional reserve mining

Peter Todd pete at petertodd.org
Tue Aug 19 02:30:25 UTC 2014

A number of people - most recently Gavin Andresen - have speculated that
cloud hashing operations may in fact be ponzi schemes that don't
actually own the hashing power they claim to own. The claim is that the
customers upfront purchase of hashing power is simply kept and used to
pay off existing customer profits rather than actually being used to
purchase mining equipment.

We can use merkle sum trees to detect this fraud cryptographically:

1) Put the MH/s paid for by each account into a merkle sum tree, each
with a customer supplied unique identifier. (like their email address)
This allows the customer to verify that the hashing power they paid for
has been included in the total hashing power claimed.

2) Mark blocks found by the operation publicly so they can be associated
with the specific cloud mining operation; putting the merkle sum tree
root hash into the coinbase or an OP_RETURN output would be ideal. This
allows anyone to verify that the hashing power claimed corresponds to
the # of blocks actually found.

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