Bitcoin is absolutely secure. That is a sentence that is perfectly true at the time of writing. But this is not only due to the fact that its technology has been proven in the past but also because of its network and its constant growth in the last couple of years. That being said, one should never take the transaction security of a network for granted. Bitcoin allows every user to check and verify literally everything in its network, including, but not limited to its monetary supply and if a transaction is valid or not.'
But there is also the possibility of fraud, meaning that an entity could try and overtake the Bitcoin network. In this article, we will discuss how this is theoretically possible and how likely this is to succeed.
Bitcoin solved the double-spending problem
One of the major breakthroughs of Bitcoin's technology is solving the double-spending problem. How do you ensure that any party in the network is not creating money out of thin air by faking supply? One could easily spend the same amount of money twice. With Bitcoin, however, this is not possible, because:
- Transactions are verified by all nodes in the network
- New BTC are only minted trough the process of mining
- Each transaction is linked with a unique hash to the whole transaction history
But what would happen if a single entity or at least a couple of powerful players on the market would try to corrupt this system? While they cannot change the code without the consent of everybody else, they surely could try to cause a disturbance with a so-called 51 % attack.
What is a 51 % attack?
A 51 % attack basically means that somebody acquires a simple majority of the hash rate within the network. This would allow the attacker to create more blocks than the rest of the network effectively putting him in the position to manipulate transactions.
Here is an example: Darin is sending Mary a transaction over 1 BTC in exchange for a lemonade. Mary is not aware that Darin has 51 % of the hash rate at his command and is trying to deceive her. Darin only has to do two things to get the lemonade without paying Mary. He prepares one legit transaction sending her 1 BTC, while he also prepares one transaction where he is transferring the same amount to him at the same time.
Once Darin has sent 1 BTC to Mary he will then use his majority in the network to mine the block that includes the second transaction that is transferring the same amount to him instead. If Mary delivers the lemonade, she will effectively receive no payment.
But Darin could go even further secretly running the second transactions in the background and propagating his version of the blockchain even after the legitimate transaction was initially confirmed by the network. Since Darin would propagate the longer chain – he has a head start, because he has more hash rate – the payment to Mary would simply be reverted.
Why is a 51 % attack not dangerous to Bitcoin?
Acquiring a 51 % or more hash rate would be an epic task for any party in the world, this includes even entities like the US government or Google. They are rich, they have a lot of resources, but it is still not possible because:
- The supply of suitable hardware is limited
- Even if there is enough hardware the price would explode
- Such a venture wouldn’t go unnoticed and the community and developers could enact countermeasures
Even if an entity would be crazy enough to go all the way and would succeed in acquiring the needed hash rate, the fraud itself wouldn’t go unnoticed by the network. It would be very easy for all honest nodes to reject the fraudulent chain with just one update. The result would be simple. Billions of Dollars would be lost for hardware and electricity for manipulating 1 transaction.
Game theory teaches us that an entity would rather use these resources for honest Bitcoin mining and get rewarded with BTC than wasting it completely in vain.
What about other cryptos?
This is in fact a more complicated matter. There have been a couple of successful 51 % attacks in past, targeting Ethereum Classic (ETC) and a couple of other proof of work altcoins. The reason why they were successful is simply that the networks of the coins in question are vulnerable because of their size. There were simply not enough miners or nodes involved with their blockchains. In effect, an attacker would need a small amount of resources to successfully gain the majority.
There are multiple countermeasures to these attacks like chain locks that make it not feasible to manipulate through a 51 % attack, even if the network itself is weak and has a low amount of hash rate to secure transactions. One notable cryptocurrency that uses chain locks is Dash.