51% Attack: All You Need to Know
51% attack is probably a term you have come across as a cryptocurrency enthusiast. This is arguably one of the vulnerabilities of Bitcoin and several other cryptocurrencies. So, what is 51% attack? Before delving in to discuss 51% attack, let’s quickly look at decentralized systems, with reference to Bitcoin network.
One of the foundational feature of cryptocurrencies is that they have been designed to avoid centralization. Bitcoin’s blockchain framework for example is revolutionary from a security point of view. Instead of storing sensitive data in one centralized location where it can be altered or stolen, thousands of identical copies are stored on different machines, known as nodes all over the world.
Bitcoin’s framework is incentivized in order to give users a reason to participate and maintain the network through mining. Bitcoin uses a proof-of-work (mining) consensus model. Meaning that majority of the nodes on the network (51%) decides which transaction is valid or not, and which new blocks should be added to the blockchain. With this in mind, let’s look at what a 51% attack is.
A 51% attack is a situation where an individual or group of individuals working together, have sufficient mining or computational power to manipulate the decisions of a network. For anybody to be able to manipulate a blockchain, he must have the power to change the data on majority of the individual nodes on the network, at any point in time, simultaneously.
Although this is theoretically possible, the likelihood of this happening in real life is currently slim, considering the level of computing that we currently use. It is unrealistic and almost impossible (cost-wise) for any single person or even advanced nation states to pull off a 51% hack on the Bitcoin network. Nonetheless, a breakthrough in quantum computing may see this happen.
How about the formation of mining pools? Presently, it is virtually impossible to mine bitcoin using CPUs. Over the years, the mining difficulty for bitcoin has gone up, making it harder for a single individual to solve a block. This has led to the formation of mining pools – where individual miners combine resources as share profits.
Most bitcoin transactions and new blocks are solved by miners participating in pools, because it is almost impossible for a single individual to engage in solo mining – finding and solving new blocks before everyone else. The fact that solo mining has become less profitable has seen mining pools grow so large. As a matter of fact, about three mining pools account for more than 50% of the estimated hashrate distribution. The largest pool in this trio accounts for approximately 25% of the 50%. We’ll have a 51% attack in our hands if these three major mining pools join forces together, or one of these exchanges grow so large that it dominates 51% of the network’s hashrate.
In conclusion, while the thought of a 51% attack is scary, it is extremely unlikely. There’s also good news and that is, in the event of such an attack the colluding group would have to alter the history of blockchain from very far back; a task that would require redoing the proof-of-work required to each block. Doing this becomes exponentially difficult with every block.