A blockchain is a ledger system that stores data. Basically, a blockchain is a network of decentralized computers that are referred to as nodes. These nodes have transactions between them that are constantly being reviewed and updated. Hash rate, on the other hand, is the total computational power directed at mining a cryptocurrency and processing its transactions.
A 51% attack happens when a hacker or a group of hackers attack a blockchain after gaining control of over 50% of a cryptocurrency’s hash rate. These attacks are rare, mainly due to the logistics involved, but they have reverberating effects on a cryptocurrency once they happen.
How a 51% attack works
Most cryptocurrencies work on a proof of work (PoW) framework. This framework is basically the system used to validate transactions. All transactions are recorded in a blockchain in blocks arranged in chronological order in order to prevent double-spending of the crypto coin.
The way mining works is a group of miners use powerful computers to try to solve an equation generated by the system. The more miners there are, the more difficult the equation tends to be. Therefore, miners aim to increase their computational power since the better a computer you have, the faster you can come up with solutions.
The first miner to solve the equation gets to act as a gatekeeper. They validate the transactions and arrange them in a block so that they cannot be reversed. Thus, if hackers take over a majority of a blockchain’s hash rate, they get to solve these equations faster and can reverse past transactions awaiting confirmation. This way, the cryptocurrencies are reversed back to them to use again. This is called double-spending. Since they now control which transactions get confirmed, the hackers can double-spend as many times as they wish.
Additionally, there usually are rewards to miners who succeed in solving the equation, mining the coins, and maintaining the blockchain. These are usually in the form of new coins of the cryptocurrency. These hackers also get to enjoy these rewards.
Satoshi Nakamoto’s Achilles’ heel
Bitcoin, the highest cryptocurrency in market cap at the moment, was the first cryptocurrency to embrace the PoW model. Its founder, Satoshi Nakamoto, wrote in his whitepaper that the majority of its CPU power needs to be controlled by honest nodes to ensure the integrity of a blockchain.
Nakamoto’s goal was to create a currency that was not controlled by any individual or government. This is why he came up with the blockchain idea. To prevent double spending, he introduced the PoW model for consensus. His idea of democratic governance of this currency assumed that malicious attackers would never seize control of the majority of a blockchain’s hash rate, which is where he was greatly flawed. He has since been proved wrong by the numerous 51% attacks that have happened over the years.
What would it cost to run a 51% attack?
So far, we have seen that controlling over half of a blockchain can enable you to double spend crypto coins valued at millions of dollars. However, this control is not cheap to obtain. The bigger a blockchain is, the more you’ll need in the way of resources to carry out this attack. This is why these attacks are far more frequent in smaller blockchains.
For instance, to carry out a 51% attack on Bitcoin, whose market cap stands at $1.11 trillion at the time of writing, would cost you $2,160,111 for every hour you have control. Litecoin, capped at $12.3 billion, would cost a mere $161,323 per hour.
Notable instances of 51% attacks
The most infamous 51% attacks have been on Ethereum Classic, Feathercoin, Bitcoin Gold, Verge, and Vertcoin blockchains. In 2018 alone, such attacks led to a loss of close to $20 million, which was pocketed by hackers.
Effects of these attacks
First and foremost, they cause untold monetary losses to crypto exchanges and users who fall prey to them. They also cause concerns about the blockchain’s security and reliability. These attacks do not produce new coins or alter past transactions, but they can tamper with unconfirmed transactions of both users and other miners.
Miners may confirm blocks that are then invalidated by the hackers, while users could get their transactions reversed by the forks created by these hackers. This makes them lose confidence in the blockchain, which drives the cryptocurrency’s price down.
In extreme cases, these attacks have led to the delisting of some crypto coins from exchange platforms. In 2018, Bitcoin Gold was delisted from Bittrex after its team refused to pay the exchange damages caused by the 51% attack in May.
Measures are taken to curb 51% attacks
Nowadays, it has become relatively inexpensive to attack blockchains, owing to the availability of CPU power for rent. There are now cloud-based hash power brokers like Nice Hash, which is a threat even to big blockchains. In addition, a majority of blockchains are hosted on the Ethereum network, which means they are using a PoW system.
To curb these attacks in the future, Ethereum launched Ethereum 2.0 in December of 2020, which uses an alternative proof of stake (PoS) model. This model randomly selects miners to validate transactions depending on their stake in the network. The idea is that a miner who is heavily invested in the network would not be up to any maliciousness, as the devaluation of the cryptocurrency would drive them to serious losses.
Though hackers are still seeking backdoors to this PoS model, they have forced crypto exchanges and currencies themselves to look for ways to improve the industry’s integrity and stay ahead of attackers.
Conclusion
A 51% attack is when hackers take over a majority of a blockchain’s computational power, which is called hash rate. With this control, they can solve the blockchain’s equation faster, which then enables them to reverse pending transactions at will. This allows them to double-spend crypto coins. In addition, they get mining rewards associated with solving the blockchain equation.
