Cryptocurrencies is the revolutionary new technology that enables you to be your own bank. But one major problem standing in its way is the threat of 51% attacks. 51% attacks are when a single mining pool gains control over more than 50% of the network’s mining power or a single group of miners gain control over more than 50% of the network’s blockchain.
A 51% attack refers to an attack on a Proof-of-Work (PoW) blockchain where an attacker or a group of attackers gain control of 51% or more of the computing power or hash rate. PoW is a system of consensus used by blockchains to validate transactions.
The scenario of a 51% attack is rare, mainly because of the logistics, hardware, and cost required to execute such an attack. But a successful blockchain attack could have far-reaching consequences for the cryptocurrency market and those who invest in it.
Investing in cryptocurrencies can be potentially lucrative but carries a higher degree of risk compared to investing in stocks or bonds. If an investor is considering adding digital currencies to their portfolio, it is important to understand the implications of a 51% attack.
Background on 51% Attacks
A 51% attack is an attack on a blockchain, which is a type of digital database in ledger form. In blockchain technology, information is collected in groups or blocks and linked together to create a chain of data. In cryptocurrency trading, the blockchain is used to record approved transfers of digital currencies and mining of crypto coins or tokens.
In Bitcoin, for example, "miners" can attempt to add blocks to the chain by solving mathematical problems using a mining machine. These machines are essentially a network of computers. When miners succeed in adding a block to the chain, they receive bitcoins in return.
The speed at which all the mining machines within the network operate is the bitcoin hash rate. A good hash rate can help measure the health of the network.
A 51% attack occurs when one or more miners take control of more than 50% of a network's mining power, processing power, or hash rate. When a 51% attack is successful, the miners responsible essentially control the network and certain transactions that take place on it.
How a 51% Attack Works
When a cryptocurrency transaction occurs, whether it is bitcoin or another digital currency, newly mined blocks must be validated by a consensus of nodes or computers connected to the network. Once this validation is done, the block can be added to the chain.
The blockchain contains a record of all transactions that anyone can view at any time. This system of record is decentralized, which means that no single person or entity has control over it. Different nodes or computer systems work together to mine, so the hash rate for a given network is also decentralized.
However, if most of the hash rate is controlled by one or more miners in a 51% attack, the cryptocurrency network will be disrupted. Those responsible for a 51% attack would then be able to:
- Exclude new transactions from the record
- Change the order of transactions
- Prevent transactions from being validated or confirmed
- Stop other miners from mining coins or tokens within the network
- Reverse transactions to double mine coins
All these side effects of a blockchain attack can be problematic for cryptocurrency investors and those who accept digital currencies as payment.
For example, a double-spend scenario would allow someone to pay for something with cryptocurrency and then reverse the transaction after the fact. They would effectively be able to keep everything they bought along with the cryptocurrency used in the transaction and defraud the seller.
What a 51% Attack Means for Cryptocurrency Investors
A 51 percent attack is not a common occurrence, but it is not something that can be brushed off. For cryptocurrency investors, the biggest risk associated with a 51% attack may be the devaluation of a particular digital currency.
If a cryptocurrency is subject to frequent block attacks, this could cause investors to lose confidence in the market. Such an event could cause the price of the cryptocurrency to collapse.
The good news is that there are limits to what a miner who stages a 51% attack can do. For example, someone staging a block attack would not be able to:
- Reverse transactions that were made by other people
- Change the number of coins or tokens generated by a block
- create new coins or tokens out of thin air
- Transact with coins or tokens that do not belong to him or her
