What is 51% Attack in Cryptocurrency? A simple to understand guide


Over the past few days, news has filtered out regarding a 51% attack on Ethereum Classic (ETC).  Scammers managed to manipulate a security flaw inherent in all Proof of Work (PoW) coins. 

Let’s discuss how this happened, and what it means as far as your investment decisions are concerned.

Quick Summary

  • Proof of Work coins on low hash networks are vulnerable
  • The Malaysian exchange OKEx was the target of attacks
  • The hackers likely further benefited by shorting ETC
  • Other consensus models also have their flaws

Ethereum Classic

ETC is the 18th largest cryptocurrency in terms of market cap, and one of the largest PoW currencies out there, with notable backers in Digital Currency Group (DCG) and IOHK.  Even so, regardless of these credentials, ETC, like all PoW currencies, fell foul to a 51% attack due to inherent flaws in the PoW mining process. 

Mining

Mining is the act of adding transactions to the blockchain.  Each time a cryptocurrency transaction is made, a miner is responsible for authenticating the information and updating the blockchain with the transaction.  The mining process involves competing with other cryptominers to solve mathematical problems using cryptographic hash functions associated with a block containing the transactional data.

Any PoW system fundamentally relies on the majority of CPU power being controlled by trustworthy nodes.  A significant security risk arises when more than half of the mining power comes from dishonest miners.

Hijacking the Blockchain

If a dishonest miner has more resources than the sum total of the rest of the network, this miner could select a random authenticated block and produce an alternative block history from that point, one which is different to that produced by the rest of the network.  This process is known as chain re-organization.

Double Spending

By itself, chain re-organization is not a major issue because all of the transactions still exist, they are simply jumbled and some transactions may be delayed.

However, re-organizing a PoW blockchain can be exploited by double spending coins.  This involves a miner spending coins in a transaction with a merchant, while at the same time extending an alternative block history.  At this point, those same coins spent with the merchant are sent to a different wallet address, controlled by the hacker, on the original chain.

After the confirmations have gone through, the merchant never receives the coins as the transactions were conducted on the alternative block history, which gets superseded by the original longer chain.  Instead, the merchant’s coins appear on orphaned blocks that do not form part of the original chain.

Suspicious Happenings

The ETC attack was first noted by Coinbase on 5th January 2019.  Their systems were alerted to a chain re-organization on the ETC network late that evening.  Initially, no double spending had occurred, but the hackers didn’t strike until the 3rd occurrence of chain re-organization.  Beginning with a double spend of 600 ETC.

At this point, they suspended ETC transactions on their platform as a precautionary measure, but it should be noted that hackers targeted the Malaysian exchange OKEx, and not Coinbase.

So far, the total value of double spends has come to 219,500 ETC (around $1.1million).

Mining Tests

At the time, Ethereum Classic, through their Twitter account, gave a differing explanation.  They went on to say that the testing of new, more efficient, ASIC mining equipment, made it seem like over 51% of the network’s hashing power was originating from a single source.  However, this pattern was simply down to a private mining pool operated by Chinese manufacturer Linzhi, testing the new equipment.

Shorting

Over the days that followed, ETC did eventually acknowledge an attack on their network.  And the ensuing fallout has brought to light serious concerns over ETC’s security, as well as the PoW consensus in general. 

Some observers have speculated that this was merely the tail end of a more sophisticated scam.  Three days before the 51% attack, OKEx added ETC shorting to their platform.  It’s entirely possible that the party responsible for the 51% attack, also shorted ETC on OKEx, thus further profiting from a fall in ETC price as markets reacted to the news.

Certainly, when shorting is available, the motivation to crash a project is high.  Which raises doubt on whether shorting should be available for fledging investments, such as cryptocurrencies.

All or Nothing

Charlie Lee has since waded into the discussion by saying, “Any truly decentralized network must be susceptible to 51% attacks”, which has done nothing but add fuel to the fire, as well as bringing to the surface longstanding spats within the community on whether Bitcoin, or indeed any mined coin, is truly decentralized.

However, regardless of which consensus model a particular cryptocurrency follows, this event has forced investors to reconsider their holdings of PoW currencies.

Yet in reality, such thinking is reactionary and doesn’t take into account the totality of advantages and disadvantages of each consensus model.  David Schwartz was quick to point out that XRP, under its pre-mined consensus model, could never be 51% attacked.  Whilst true, what many people fail to realize is that XRP, under a centralized model, is still subject to other routes of attack.  For example, is highly vulnerable to regulatory influence.

So, before anyone dismisses PoW coins as high risk and un-investable, it would be sensible to also consider the disadvantages found within other consensus models.

Summary

PoW cryptocurrencies, especially ones with less hash power securing the network, are vulnerable to 51% attacks.  And if there are financial incentives in place to short a cryptocurrency, or simply profit from controlling the network, there are unscrupulous parties who could take advantage.  However, this alone should not shape investment decisions, as each consensus model has their own pros and cons.

 


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Wilson

Wilson is a 3x Startup Entrepreneur. He is passionate about the cryptocurrency space. You can catch him tweeting about cryptocurrency often @itswilson8 You can also email Wilson directly at wilson@cryptomenow.com

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