This essay analyzes a 2016 proposal for a hard fork to change the Bitcoin source code so that a patented ASIC mining enhancement would no longer function. The developer who proposed the hard fork was concerned that a patent monopoly on a bitcoin mining enhancement named AsicBoost could harm the Bitcoin ecosystem. The hard fork did not take place due to a lack of consensus. As an alternative approach to resolve this potential threat to the Bitcoin ecosystem, several mining companies created the Blockchain Defensive Patent License.
AsicBoost, invented by former CoinTerra CTO Timo Hanke, can achieve performance enhancements in bitcoin mining of up to 30% and potentially save miners utilizing the technology millions of dollars in mining costs per year.1 The inventors of AsicBoost applied for patents on the technology in several countries, including China and the USA.2
If only one bitcoin miner or a subset of the mining community receives an exclusive license to the patented AsicBoost technology, that miner or group of miners could achieve significant savings that other miners could not achieve. A patent monopoly could potentially result in destabilization of the Bitcoin blockchain network if competing miners dropped out of the proof-of-work competition, resulting in increased concentration of mining power. To prevent this problem from happening, in May 2016, Bitcoin developer Peter Todd proposed changing the Bitcoin blockchain software to prevent the AsicBoost patented enhancement from being used by bitcoin miners.3 Peter Todd proposed that this change be included as part of the SegWit2X hard fork that was proposed at the February 21, 2016 Hong Kong Bitcoin roundtable meeting.4
Although the Bitcoin developers discussed how Bitcoin’s proof-of-work hashing algorithm could be modified to block AsicBoost from providing a performance enhancement to the proof-of-work computations, such a proof-of-work change would not be backwards compatible. This type of change is referred to as a hard fork, because only nodes with the updated software would be able to participate in the blockchain.5 The Bitcoin community is resistant to making hard forks, and prefers soft forks (backwards compatible changes) because of a fear of a hard fork causing a split in the community.
The developers did not reach a consensus on whether to include this proposed change in the Bitcoin Core software.6 Furthermore, the proposed hard fork also did not take place,7 and the Bitcoin Core software was not modified to block the patented AsicBoost technology.
On May 17, 2017, a U.S. law firm representing the inventors posted an open letter claiming that several manufacturers of Bitcoin mining equipment were infringing the inventors’ patent rights, either openly or secretly.8 In response to the controversy over the AsicBoost patent, several mining manufacturers created the Blockchain Defensive Patent License in an attempt to defend against patent enforcement by current and future patents on bitcoin mining techniques. Today the majority of bitcoin miners use AsicBoost, either openly or secretly.9
This essay analyzes the arguments that were made in favor of and against forking Bitcoin to block the AsicBoost patent. This paper also discusses Blockchain defensive patent schemes that were created in response to the AsicBoost controversy, and which may have reduced some of the arguments in favor of the need to modify the source code to avoid patent monopolies.
Deciding to change the Bitcoin core software is a time-consuming process, and many proposals to change Bitcoin are never accepted. The mining community has invested tremendous amounts of money in mining hardware and is resistant to changes that will render their investment obsolete. In this particular case, the proposed hard fork would have impacted miners that were using AsicBoost (as Bitmain was alleged to be using AsicBoost10) by causing them to lose their performance enhancement, and impacted miners that were not already using AsicBoost by causing them to change their mining software.
One of the specific fears with regards to blockchain patents is that if a mining company or pool has a monopoly on a patented technology, the patent owner will be able to benefit from their new technology while other miners cannot benefit as much. This is because the other miners will be using the older technology if the patent owner uses their patent to exclude competitors, as opposed to just charging a reasonable royalty for the use of their technology.11 While such is true for all technologies where patent monopolies are granted, it is feared that a monopoly in the area of bitcoin mining would be particularly problematic. If the mining company has a patent on a more efficient ASIC mining technology, this could eventually lead to a concentration of mining power sufficient to render blockchain networks vulnerable to attack.12 Bitcoin’s proof of work algorithm helps to secure the network against attack by randomly rewarding miners who work on the proof of work algorithm. The resulting creation of the miners, the chain of POW-protected blocks, is believed resistant to attacks unless the attacker can amass over 50% of the hashing power of the network (the 51% attack). If there is increased concentration in a single miner or mining pool, then the network could be more vulnerable to a 51% attack, which would enable an attacker to double-spend their bitcoin.
Bitcoin does not depend entirely on cryptographic algorithms to secure the blockchain network, but also relies upon economic incentives and the entire ecosystem to secure the network. Miners earn bitcoin for their work and own bitcoin. While miners want to maximize their profits, they do not want to cause the value of bitcoin to fall. Miners and mining pools have economic incentives to avoid amassing 51% of the network, for fear of causing the price of bitcoin to drop.
Open Source Software (“OSS”) developers have historically been hostile to intellectual property in general, and patents in particular. OSS developers generally believe in the concept of the free flow of ideas and information. As most Bitcoin development is done in open source software, it should not be surprising that there were would be hostility in the Bitcoin community to the idea that a new innovation such as AsicBoost is covered by a patent application filed by the inventors of the technology. The OSS community would argue that inventors should not receive a monopoly for 20 years over a new technology.
One of the arguments against changing the Bitcoin software to block AsicBoost is that there are many patented innovations in the blockchain area, so why change the Bitcoin Core for just one patent? A patent landscape report hosted on the LOTnetwork website lists over 28,000 patents in the blockchain area, including both hardware and software patents.13
Furthermore, the argument in favor of patents is that patents are an economic incentive to promote disclosure of inventions that would otherwise be kept secret, in exchange for granting the inventor a limited time monopoly over the usage of the invention. If patent rights were not granted, the inventors of AsicBoost might keep the innovation a secret, as other non-patented ASIC enhancements are kept secret in ASIC chips.
It is also questionable as to how much of an advantage AsicBoost provided and whether other competing ASIC enhancements offered similar or greater boosts to efficiency.
With arguments on both sides, the controversy led to the creation of several defensive patent schemes that are discussed below. Between the defensive patent schemes below and the uncertainty as to whether the AsicBoost change was really needed, the proposed change to the Bitcoin Core software did not take place.
Patent claim language is a mixture of technical and legal language and requires subject matter experts to interpret, often only after significant time and expense. Patents are assets that can be transferred and sold. Some of the clauses in the patent defensive schemes described below are intended to prevent patent litigation after a patent has been transferred from the original inventor to a patent assertion entity (i.e. a corporate entity specifically created to assert patents against potential infringers).
Patents do not exist in a vacuum, and the owners of patented inventions often have economic incentives that lead them not to assert their patents against other parties in litigation. If two parties both own patents in a technology, each may forbear from suing the other for patent infringement, for fear of being counter-sued. However, this patent detente approach may not be sufficient to prevent patent lawsuits, particularly when one party does not have the same amount of investment at stake as another party or when there are many parties involved. This has led to the creation of patent defensive schemes described below. One of these schemes, the Blockchain Defensive Patent License, which the owners of the AsicBoost patent joined, essentially ended the controversy over the AsicBoost patent.
The License on Transfer Network (“LOTnetwork”) members agree each member of the community receives a license if a member’s patent is obtained by a Patent Assertion Entity (a company that receives more than 50% of its revenue from patent assertions). Traditional uses of patents are not affected, other than reducing the value in transferring patents to a Patent Assertion Entity.14 Over 1300 companies belong to the LOTnetwork, including the top 11 blockchain patent owners.15 The LOTnetwork has special resources for blockchain patents.16
The Defensive Patent License (“DPL”) was created to provide patent projections similar to an open source software license. The members of the DPL include: Blockstream, the Internet Archive, and John Gilmore, Trustee. 17
The Blockchain Defensive Patent License (“BDPL”) was developed specifically because of AsicBoost and related mining patents, to prevent the risk of a mining company or coalition creating a monopoly over a new mining technology. The BDPL adds some additional restrictions to the DPL referenced above, to reduce the risk of a BDPL participant colluding with a non-BPDL participant harming other BPDL participants.18 The participants for the BPDL include several companies involved in Bitcoin mining: Little Dragon Technology LLC, Halong Mining, QRF Solutions Pte Ltd, Whalechain Technology Co. Ltd, Cynosure Technologies Co. Ltd, ShenZhen Microbt Electronics Technology Co. Ltd, and Bitfury Group.19
Cryptocurrency Open Patent Alliance (“COPA”) members pledge that they will not assert their patents against anyone except for defensive purposes. COPA members also agree to grant their patents to be part of a Shared Patent Library that can be used defensively on behalf of any members of the COPA.20 The members of the COPA include: Square, Blockchain Commons, Carnes Validadas, Request Network, Foundation Devices, ARK, SatoshiLabs, Transparent Systems, Horizontal Systems, VerifyChain, Blockstack, Protocol Labs, Cloudeya Ltd., Mercury Cash, BitHyve, Coinbase, Blockstream, and Stakenet.21
The LOTnetwork is best for protection against a wide range of patent assertion entities due to its large community. The LOTnetwork is limited in that it provides no protection against the other members of the community, and members can still sue each other for patent infringement. The DPL, BPDL, and COPA give strong protection against the other members that join those agreements, preventing patent infringement suits between members. The BDPL and COPA are newer than the DPL and have somewhat different restrictions than the DPL, but all three agreements have the same essential goal of preventing patent infringement suits between members. None of these agreements are exclusive, so a single company could join all four community networks to maximize their patent defenses.
There is no overlap between the member organizations in the COPA and the BDPL. Blockstream is a member of both the COPA and the DPL. Square is a member of the LOTnetwork and the COPA.
The AsicBoost patent controversy led to the creation of the Blockchain Defensive Patent License and may also have influenced the creation of the COPA. The development of these new patent defensive schemes may be sufficient to protect the Bitcoin ecosystem from the threat of the AsicBoost patent. These new patent defenses may also assist in preventing the rise of similar controversies in the future.