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Censorship meaning: Only government approved addresses are allowed to have their transactions added to the blockchain.

Scenario: Miners are centralised within a geographic boundary with significantly cheaper energy and more processing power making competition impractical. The government of this geographic boundary now comes to the mining company and says: "Here's a list of approved addresses, if any other addresses are allowed to transact we'll put you all in jail"

From my understanding this is a possible scenario although I am uncertain about the likelihood of this happening and the incentives that might lead to this or would prevent this from happening. What is your understanding on these incentives? Is this a problem or is it unrealistic?

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Scenario: Miners are centralised within a geographic boundary with significantly cheaper energy and more processing power making competition impractical. The government of this geographic boundary now comes to the mining company and says: "Here's a list of approved addresses, if any other addresses are allowed to transact we'll put you all in jail"

This would not work.

Miners must mine the blocks that users want them to mine. If they don't, users won't buy the bitcoins mined in those blocks. Users believe that censorship resistance is the value proposition of bitcoin. So they would have no interest in buying bitcoins mined in blocks enforcing effective censorship.

Exactly how this would play out could vary based on the exact scenario you imagine, but one thing that could happen is that users would agree to change the mining algorithm. Nobody in the regime that was trying to enforce censorship would bother buying ASICs that implement the new algorithm since they know that if they can't censor effectively they'll be in legal trouble and if they can censor effectively, their ASICs will be worthless.

In short, miners that destroy bitcoin's value proposition render their own ASICs worthless.

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I will try to combine both answers by Hugo Franklin and David Schwartz with my thought process in the hope that this could add value to others.

The scenario of geographically centralized Bitcoin miners that are censoring transactions is one that is unrealistic for a multitude of reasons.

Bitcoin mining is permissionless so anyone can participate, i.e. compete. Not only that, but there is lots of energy that is not being used due to expensive transportation which Bitcoin does not need. Effectively not only can anyone compete, but there are many people and places for whom it will always be worth it to compete.

So it's already unlikely that this part of the scenario would happen but suppose it did.

Any attempts at censorship would lead to the censored addresses paying higher transaction fees to incentivise miners to include their transaction. So effectively the more you censor, the more competition you invite. This makes the success of the censorship even less likely.

Summarised: The permissionless nature implies that centralization of the mining would be extremely difficult to achieve, once achieved it would once again be virtually impossible to continually enforce censorship, which, in the case it somehow still does work out, would be entirely self destructive.

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If the list of censored addresses ever becomes public, the owners of said coins will be motivated to spend them (wash them) using non complying miners blocks to a fresh set of addresses, and can pay elevated fees for the privilege of doing so. And so the government will be forced to come up with a new list of addresses.

However the government will be unable to come up with a mechanism to perpetually extend the set of blocked addresses perpetually. Any mechanism to create such a growing set of banned addresses (so to speak) is equivalent to a haircomb commitment set and implies the existence of private and untraceable currency.

Now assume on the contrary, that the list of censored addresses is non-public. This implies that the government is secretly colluding in a cartel to raise fees for spending a specific unknown set of addresses. However, the miners are by necessity anonymous (1 doublehash = 1 vote). Any such cartel is unstable and will necessary collapse due to deflection.

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    This answer somewhat sidesteps the scenario posed in the question since the asker starts from a list of permitted addresses.
    – Murch
    Commented Jul 18, 2022 at 19:09
  • If I understand correctly, there is the assumption that there will always be non complying miners, which leads to it being unlikely that a list of blocked addresses would be sustainable and even more so in the case of a list of permitted addresses. I'd be curious to know what this assumption (assuming it was made) is based on. How hard would it be to make any competitive mining unfeasible/impractical?
    – MManke
    Commented Jul 18, 2022 at 20:34
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    Only way to make to ban non-complying mining is to hold 51% of the hashrate. Commented Jul 19, 2022 at 3:29
  • Ah, the assumption about Bitcoin resisting state control? That would be the axiom of resistance. Commented Jul 19, 2022 at 4:17
  • I think you meant "defection" not "deflection".—As pointed out above, you're answering something else than the question asked. The scenario differs significantly between an allowlist and a banlist, e.g. because it forces address reuse and is much easier to propagate an allowlist in due time.
    – Murch
    Commented Jul 26, 2022 at 10:28

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