Peter Todd wrote:
  Fixing block withholding is relatively simple, but (so far) requires a
SPV-visible hardfork. (Luke-Jr's two-stage target mechanism) We should
do this hard-fork in conjunction with any blocksize increase, which will
have the desirable side effect of clearly show consent by the entire
ecosystem, SPV clients included.

I think we can generalize this and argue that it is impossible fix this 
without reducing the visible difficulty and blinding the hasher to an 
invisible difficulty. Unfortunately, changing the retargeting algo to 
compute lower visible difficulty (leaving all else the same) or 
interpreting the bits field in a way that yields a lower visible 
difficulty is a hard fork by definition - blocks that didn't meet the 
visible difficulty requirement before will now meet it.

jl2012 wrote:
>After the meeting I find a softfork solution. It is very inefficient 
>and I am leaving it here just for record.
>
>1. In the first output of the second transaction of a block, mining 
>pool will commit a random nonce with an OP_RETURN.
>
>2. Mine as normal. When a block is found, the hash is concatenated with 
>the committed random nonce and hashed.
>
>3. The resulting hash must be smaller than 2 ^ (256 - 1/64) or the 
>block is invalid. That means about 1% of blocks are discarded.
>
>4. For each difficulty retarget, the secondary target is decreased by 2 
>^ 1/64.
>
>5. After 546096 blocks or 10 years, the secondary target becomes 2 ^ 
>252. Therefore only 1 in 16 hash returned by hasher is really valid. 
>This should make the detection of block withholding attack much easier.
>
>All miners have to sacrifice 1% reward for 10 years. Confirmation will 
>also be 1% slower than it should be.
>
>If a node (full or SPV) is not updated, it becomes more vulnerable as 
>an attacker could mine a chain much faster without following the new 
>rules. But this is still a softfork, by definition.
jl2012's key discovery here is that if we add an invisible difficulty 
while keeping the retarget algo and bits semantics the same, the visible 
difficulty will decrease automatically to compensate. In other words, we 
can artificially increase the block time interval, allowing us to force 
a lower visible difficulty at the next retarget without changing the 
retarget algo nor the bits semantics. There are no other free parameters 
we can tweak, so it seems this is really the best we can do.

Unfortunately, this also means longer confirmation times, lower 
throughput, and lower miner revenue. Note, however, that confirmations 
would (on average) represent more PoW, so fewer confirmations would be 
required to achieve the same level of security.

We can compensate for lower throughput and lower miner revenue by 
increasing block size and increasing block rewards. Interestingly, it 
turns out we *can* do these things with soft forks by embedding new 
structures into blocks and nesting their hash trees into existing 
structures. Ideas such as extension blocks 
[https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2015-May/008356.html] 
have been proposed before...but they add significant complications to 
the protocol and require nontrivial app migration efforts. Old nodes 
would not get forked off the network but backwards compatibility would 
still be a problem as they would not be able to see at least some of the 
transactions and some of the bitcoins in blocks. But if we're willing to 
accept this, even the "sacred" 21 million asymptotic limit can be raised 
via soft fork!

So in conclusion, it *is* possible to fix this attack with a soft fork 
and without altering the basic economics...but it's almost surely a lot 
more trouble than it's worth. Luke-Jr's solution is far simpler and more 
elegant and is perhaps one of the few examples of a new feature (as 
opposed to merely a structure cleanup) that would be better to deploy as 
a hard fork since it's simple to implement and seems to stand a 
reasonable chance of near universal support...and soft fork alternatives 
are very, very ugly and significantly impact system usability...and I 
think theory tells us we can't do any better.

- Eric