Why 51% Attack is Dangerous for Bitcoin and Blockchain?
Decentralization of cryptocurrency underpins the sharing of network power among miners around the world. The most significant drawback of blockchain technology is considered the possibility of a 51% attack, which can destroy the reputation of the cryptocurrency and harm the entire transaction chain.
What is 51% attack?
A 51% attack is a system takeover, in which the attacker’s power exceeds the rest of the system’s power by at least 1%. By taking possession of a controlling power pack, an attacker can single-handedly manipulate the system, control all transactions in it, and generate blocks.
The attackers can be either one miner with a large concentration of computing equipment, or a group – a pool.
It is also worth noting that 51% ownership of the entire network is not an attack as long as the participant acts in accordance with the rules and does not interfere with the natural operation of the system. Although this harms the rest of the miners and makes mining unprofitable, if the transactions are confirmed correctly, then the participant does not harm the system. For example, having seized 51% of the power of the Bitcoin network, a user can almost honestly earn about 900 BTC per day. The attack begins where the participant uses his advantage to dishonest prey.
How does the 51% attack happen?
Blockchain-based cryptocurrencies are based on distribution ledgers, transactions on which are confirmed by miners. The more computing power is concentrated in the hands of the miner, the more likely it is to find the right solution first, to get the right to create a new block and the corresponding reward for confirming the transaction.
Accordingly, if 51% of the computing power of the entire system is in the hands of a miner or a pool, then this participant is guaranteed to be able to single-handedly control all operations in the system, generate blocks, confirm or block transactions.
Why do this?
With 51% of the network’s power, an attacker can:
- freeze the system;
- stop confirming transactions;
- suspend mining;
- deprive other miners of the ability to confirm transactions;
- write off funds again.
The biggest threat to the system is considered to be double spending. So, having 51% of the power, an attacker can create a hidden alternative blockchain and use it to confirm their own transactions. For example, confirming a transaction on the Bitcoin network requires six disclosed transaction blocks. Accordingly, the attacker needs to create six blocks. Then he writes off his funds on the main blockchain, for example, transfers to another account or pays for a purchase, and opens his own block chain, causing a conflict in the system. If both miners have found the correct solution to one block, then the network branches out, where both solutions have the right to exist and are included in the next block of transactions.
The remaining 49% of the network capacity confirms the withdrawal of funds from the account, but since the attacker has control power, the system recognizes the attacker’s network of transactions as correct, in which he has not yet debited the funds, and the transaction confirmed by other miners will be discarded, since the attacker’s block has great complexity. Accordingly, the system will reflect the balance before the transaction and the attacker will be able to spend the funds several more times, but with each subsequent time the value of the coins will decrease.
Double withdrawal of funds is possible with less control over capacity, but it is the concentration of 51% that provides a 100% guarantee that the attacker’s block will be recognized as the correct block.
With 51% of the system’s power in hand, an attacker practically becomes the owner of the blockchain, can independently generate blocks, confirm and reject transactions. Having taken over the system, you can also stop its work by refusing to confirm all transactions.
Attacked Cryptocurrencies 51
Unfortunately, all cryptocurrencies, where the confirmation of transactions is carried out by network participants, are subject to an attack of 51%.
For cryptocurrencies operating on the PoW algorithm, where transaction confirmation is carried out by the computing processes of miners and confirmation of the work done, the attacker should concentrate 51% of the network’s power in his hands.
For digital currencies operating on the PoS algorithm, where transactions are confirmed by validators with large accumulations of coins, an attack is possible when 51% of all coins are concentrated in the hands of the attacker. It should be noted that an attack on POS systems is not profitable, but theoretically possible.
51% of cryptocurrencies, which have not yet received due popularity among users, are most susceptible to the danger of attacks, respectively, the complexity of their network is much less than that of top cryptocurrencies. You can take advantage of the network on forks by solely owning a system of relatively low power. In commercial terms, this is less profitable than an attack on large structures, but it is possible to neutralize a competitor.
Notable 51% Attack Cases
In 2016, two Ethereum-based cryptocurrencies, Krypton and Shift, were attacked by a group of hackers calling themselves Team 51. As a result of the attack, the attackers managed to double write off funds and steal 22,000 coins through the Bittrex exchange.
The most precedent case occurred with the Verge cryptocurrency, but this attack was made possible by an error in the code. The anonymous cryptocurrency operated on several algorithms at once, which had to change with the creation of each new block, but a bug was discovered in the code, thanks to which the attackers sent blocks with a false timestamp to the network.
Blocks were generated and sent every second, instead of the set timer of 30 seconds. The attack lasted three hours, and the attackers managed to seize 99% of the blocks. According to the official data provided by the developers, 250,000 tokens were fraudulently withdrawn from the system, but according to users, the real figure reaches almost 4 million.
Attack 51 on Bitcoin
At the moment, taking over 51% of the power of large networks of Bitcoin or Ethereum is almost impossible, since the computing power of the network is very large and grows daily.
According to experts, only large manufacturers of mining equipment or pools can take over most of the Bitcoin network.
In 2014, 55% of the Bitcoin network was taken over by the Ghash.io pool. Despite the fact that this was not a planned attack, and the pool itself voluntarily agreed to reduce the power indicators and henceforth promised not to exceed 40% of the threshold, the bitcoin rate fell by a quarter of the cost.
This is explained by the fact that it is economically disadvantageous for large pools and producers of computing power, since during an attack, capitalization falls in relation to the stolen coins, which inevitably also decreases the reputation of the cryptocurrency and its value. That is, only those who earn money from it can take possession of 51% of a large network, but it is not profitable for them.
However, a 51% attack could be a major problem for Bitcoin in the future. Every four years the block reward is halved. If now it is estimated at 12.5 BTC, then by 2020 it will be 6.25 BTC, and if the cost of Bitcoin by this time cannot cover the difference in rewards and mining costs, then miners will leave mining en masse and the system will become vulnerable.
Why is 51% attack dangerous?
51% attack on the network entails:
- possible suspension of mining and verification of transactions;
- falling reputation and trust in cryptocurrency;
- decrease in capitalization;
- decline in the rate of tokens.
In recent years, the 51% attack and the fears associated with it managed to acquire a huge number of myths, but according to experts, its destructive effect is too exaggerated, and the costs are not always able to exceed the income from the attack.
An attacker can change the history of transactions only in his own blockchain, it is impossible to make changes to the history of previous transactions, so user funds cannot be stolen. An attacker also cannot change the blockchain technology.
A 51% attack on large networks is too costly in terms of hardware investment. In order to recapture this money, you need to have a huge amount of coins on your wallet for a double write-off, since with each subsequent false write-off, their value will decrease.
The 51% attack poses the greatest danger for developing cryptocurrencies. It is easy to take over such a system and, although it will not bring significant profit, it will cause irreversible damage to the cryptocurrency, which will lose user confidence and most likely cease to exist.
In addition, owning 51% of the power deprives the cryptocurrency of decentralization, since it becomes possible to single-handedly make decisions on transaction confirmations. This can even act as a method of government control of the cryptocurrency market.
In theory, a 51% attack is possible on all cryptocurrencies.
But capturing 51% of the power of popular cryptocurrencies is not relevant and will not become critical, but for small projects that have not attracted a huge number of miners, it can become fatal. Accordingly, the ability to capture the system also performs the function of natural selection of cryptocurrencies, in which only projects that are able to maintain the functionality and demand for cryptocurrency at the proper level survive.
For ordinary investors and miners, the seizure of the system is dangerous only by temporarily stopping the confirmation of transactions and reducing the cost of coins. Before making an attack, a hacker should think three times and calculate the correspondence between the costs of achieving the goal and the possibility of making a profit from this.