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Many countries around the world have provisions for shutting off the Internet as well as isolating itself from the Internet (where networking within borders still flourishes), any transaction processing (mining) going on within that country will only find nodes within that country and start following its own chain.

Is this a correct assumption?

Secondly, if this is a correct assumption, how will the network deal with this once it comes back online?

I foresee alt-chains emerging due to this, and persisting with their own exchange rates, very similar to the different fiat currencies today.

So:

  1. Are my assumptions correct?
  2. What, if any, provisions does the bitcoin protocol have for forks of this size (which wouldn't necessarily be that large, but still have real consequences for people forced to use them)?
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Your assumptions are perfectly right. Since there is no information exchange between the two partitions while the network is partitioned, and Bitcoin guarantees liveness, the global consistency suffers (see CAP Theorem). This means that each partition will have its own blockchain fork, unaware of each other. The forks are incompatible not just because the chain is defined to be a single path from a single header block to the genesis block, but also because transactions in the partitions will contradict each other (not least the mining generation transaction in the block). Should the partition be prolonged the forks may even start to diverge in difficulty, as they will only see the computational power in their own network and adjust accordingly.

As for the merge, this is still being discussed and we do not have a good contingency plan. Letting the system merge the forks by itself, i.e., dropping the fork with the least work in it, would roll back the entire transaction history in that partition. A manual intervention by making the fork persistent (the alt-coin scenario you mentioned) is also not desirable, as it results in an immediate doubling of the funds in circulation, Furthermore it is likely that one of the forked alt-coins is going to whither and eventually be abandoned anyway. For now the best we can do is attempt to avoid prolonged chain forks, but the risks you pointed out are real and worth discussing before it's too late.

  • Possible solutions, 1) credit based transactions in the event of isolation, such as like Ripple or maybe something more traditional that is simply backed by the main chain. Completely ignoring their local miner's alt-chain. 2) Google's balloon based mesh network that will always be circling the globe within the stratosphere if they do it google.com/loon , this should have better latency than satellite – CQM Jul 17 '13 at 11:54
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    Ignoring the local chain and using the rest-of-world chain would be a solution only if the partition is not complete. I am assuming that there is no way that users in a partition can exchange any kind of information with the outside world. Google Loon is simply an example of circumventing the partition problem. This is clearly not the intended solution of the OP. In non complete partitions even having some guy manually synchronizing the chains by smuggling a USB stick would be enough to establish some sort of bridge between partitions, but that's not the scenario IMHO. – cdecker Jul 17 '13 at 14:12
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The answer is simple: if a country blocks off external internet access, its inhabitants effectively cannot use Bitcoin while the country is blocked.

Sure, the protocol will continue with a fork ... but this fork has no hopes of ever "reconnecting" with the main blockchain, so any blocks generated / signed in the fork are useless. The country will have effectively prohibited its denizens from using Bitcoin.

They can indeed use a specialized fork designed for this country, or even the naturally-occurring forked copy, but the value of this fork will not be tied to the value of Bitcoin.

This scenario is not a real problem for Bitcoin, rather it's a problem for citizens of countries that are at risk of being disconnected from the internet. If you believe that your country will never execute such a separation, then you're safe.

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    okay, alt-chains are an inevitable outcome of this experiment then, with their own exchange rate. – CQM Jul 19 '13 at 15:00
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Your assumptions are correct.

If we presume the mining work done in the isolated country is 5% of the global mining power then the chain in the isolated country will fall seriously behind, creating initially a new block only every 200 minutes on average until difficulty adjustment and the work done, nonetheless, will be on a fork which is sure to be abandoned anyway (due to lower work & lower tip height) once the partitioning issue is resolved, or, the first time someone sends over a USB with the main chain on it. That would result in a significant reorganisation in the isolated partition, but, it is curently the best right answer for this to happen.

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