So, what exactly is a 51% attack, how is it performed, and what effect does it have on cryptocurrencies?
Proof-of-Work in a Nutshell
Suppose you and I have struck a deal, and now I need to pay you in crypto. The transaction needs to be validated. An independent third party must check the details to verify that I do have this amount of crypto on my wallet and that the digital signature is correct. Sounds easy? It’s not.
But what if I make a thousand fake accounts to flood the network? What if I purposefully validate the impossible transaction?
This is where the Proof-of-Work consensus mechanism comes into play. A miner must perform a complicated mathematical task to validate each block of transactions. This prevents malicious actors from creating sock puppet accounts: to do so, they would have to spend enormous amounts of money on hardware.
Sometimes two miners create a block simultaneously, and a blockchain forks. To prevent this ambiguity, a blockchain always adopts the longest subchain.
And this is exactly the vulnerability the 51% attack capitalizes on. Imagine I send you one bitcoin and simultaneously send the same Bitcoin to my second wallet. A fork occurs. Miners start working on two routes. Your route takes the upper hand. A transaction is verified, and you receive the payment… Everything is fine, isn’t it?
No. As soon as I receive the goods, I will start working on the other fork route. The moment I get control over 51% of the computing power in the network, I can prevent other miners from gaining confirmation for their blocks. This means that I will inevitably construct a longer chain, and all blocks in the ‘honest’ chain will be discarded. The blockchain will be reorganized.
Other Consequences of 51% Attacks
This is called double-spending, and this is only one of the negative consequences of a 51% attack. As I’ve mentioned above, it can prevent selective (or all) transactions from being validated, prevent other miners from gaining block rewards or even change the order of transactions. And lastly, 51% attacks may lead to the devaluation of the cryptocurrency and considerable losses for crypto exchanges. Sometimes the cryptocurrency even gets delisted from major exchanges.
Still, these are only short-term effects. The true danger of 51% attacks lies in the possible loss of long-term investor confidence in a given cryptocurrency – or even cryptocurrencies in general. The reason for that is simple: they undermine the conceptual basis of blockchain technology, breaking its basic rules of immutability and decentralization.
That’s Theory. How About Practice?
To try to answer this question, let’s return to recent events. After several 51% attacks, the price of Bitcoin SV still continues to climb up. It may be a sign that they are not necessarily a grave disruption, but rather an annoying distraction. There is another explanation: maybe, the market is way too overinflated to notice the fundamental risk?
Share your thoughts in the comments!