51%-attack

51% Attack And Why It Matters To Understand Blockchain Business Models

A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

AspectExplanation
DefinitionA 51% Attack, also known as a majority attack or double-spending attack, is a cybersecurity threat in blockchain technology, particularly in Proof-of-Work (PoW) and Proof-of-Stake (PoS) based blockchain networks. In a 51% Attack, a single entity or group of malicious actors gains control of more than 50% of the network’s mining power or staking power, allowing them to manipulate the blockchain’s transactions and potentially undermine its security and integrity. This control enables the attacker to reverse transactions, engage in double-spending, and disrupt the consensus process, causing network instability and loss of trust. A successful 51% Attack can have severe consequences for the affected blockchain and its users.
Key ConceptsBlockchain Consensus: The security of blockchain networks relies on consensus mechanisms, such as PoW or PoS, where participants validate transactions and create new blocks. – Majority Control: The core concept of a 51% Attack is that the attacker gains control of over 50% of the network’s computational power (PoW) or staking power (PoS). – Double-Spending: With majority control, the attacker can execute double-spending by spending the same cryptocurrency tokens in multiple transactions. – Network Manipulation: The attacker can manipulate the blockchain’s transactions, block creation, and consensus process.
CharacteristicsControl Over Consensus: The attacker has the ability to control the consensus process, allowing them to decide which transactions are valid and which are not. – Double-Spending: One of the primary goals of a 51% Attack is to perform double-spending, where the same cryptocurrency tokens are spent in multiple transactions. – Blockchain Reorganization: The attacker can reorganize blocks in the blockchain by creating an alternative longer chain, potentially invalidating previous transactions. – Network Instability: Successful attacks can lead to network instability, distrust, and a loss of confidence among users.
ImplicationsTransaction Reversal: The attacker can reverse transactions, potentially causing financial losses to network users. – Double-Spending: Double-spending can undermine the trust in the cryptocurrency and disrupt its use as a medium of exchange. – Network Integrity: A 51% Attack can damage the integrity and credibility of the affected blockchain network. – Security Concerns: It highlights the importance of security measures to protect against such attacks, especially in PoW and PoS systems.
AdvantagesThere are no inherent advantages to a 51% Attack. It is considered a severe security breach and is typically carried out with malicious intent. However, awareness of the threat has led to increased emphasis on blockchain security and the development of countermeasures to prevent and mitigate such attacks.
DrawbacksSecurity Risk: The primary drawback is the significant security risk it poses to blockchain networks, as it can undermine trust and confidence in the technology. – Loss of Trust: Successful attacks can lead to a loss of trust among users, potentially damaging the reputation of the affected blockchain. – Reversal of Transactions: Transaction reversals can cause financial harm to individuals and businesses using the blockchain. – Mitigation Complexity: Preventing and mitigating 51% Attacks can be technically complex and may require network upgrades and protocol changes.
ApplicationsA 51% Attack is not a legitimate or sanctioned application but rather a threat to blockchain networks. However, it is a concept that developers, miners, and stakeholders must be aware of to protect blockchain systems from potential attacks.
Use CasesEthereum Classic (ETC): Ethereum Classic experienced a 51% Attack in 2020, highlighting the vulnerability of PoW-based blockchains. – Verge (XVG): Verge faced multiple 51% Attacks, leading to concerns about its security. – Bitcoin Gold (BTG): Bitcoin Gold suffered a 51% Attack that resulted in double-spending. – Feathercoin (FTC): Feathercoin experienced a 51% Attack that led to concerns about blockchain security. – Litecoin Cash (LCC): Litecoin Cash was subjected to a 51% Attack, raising questions about the security of PoW networks.

Understanding a 51% attack

In controlling at least 51% of the blockchain network, miners can double-spend cryptocurrencies such as Bitcoin. This is achieved by reversing transactions that have already taken place. Consider the example of the purchase of a new car for 10 Bitcoins. Once the car has been delivered to the buyer, logic dictates that Bitcoins are transferred to the seller. In a 51% Attack, however, the buyer (attacker) cancels the transaction before it is confirmed. This means they take ownership of the car in addition to the 10 Bitcoins used to fund its “purchase”.

The attack relies on a few conditions being met. Miners intent on attacking the network need enough computational power to solve equations more quickly than other miners. This gives them the ability to act as somewhat of an auditor, reversing transactions that need to be confirmed while also preventing new transactions from being confirmed. 

Invariably, attackers use their power to solve equations in secret and not broadcast solutions to the rest of the network. This results in the formation of a separate and secret blockchain operating in parallel to the original, legitimate chain. Corrupt miners then spend their surreptitiously mined Bitcoin rewards on this legitimate version.

Preventing a 51% attack

Generally speaking, the likelihood of a 51% attack occurring is almost nil. Some have gone as far as suggesting that such an attack is purely theoretical. As a blockchain grows large enough, it becomes near impossible for a single entity to obtain enough computing power to overwhelm all other users. Such a move would also require an exorbitant amount of capital to fund energy and hardware costs.

Nevertheless, the mining pool GHash.IO reached a level of approximately 55% of Bitcoin’s hash rate over 24 hours in June 2014. While this was not a deliberate attempt to gain control of the network, it does illustrate that an attack is possible. This is particularly salient for networks with a smaller hash rate such as Ethereum Classic, which has suffered from numerous 51% attacks in recent years.

Preventing attacks on smaller networks means following the example of Bitcoin. The first and most obvious strategy involves the decentralization of mining power to ensure that no one has more than 50% control. 

The second (and arguably longer-term) strategy involves making smaller networks more robust. In the case of Bitcoin, the network is so robust that attackers can make more money mining legitimately than they can by orchestrating a 51% Attack. This fact alone reduces the vulnerability of the network significantly.

Key takeaways:

  • A 51% attack is an attack on the blockchain network by an entity or organization for financial gain.
  • A 51% attack allows the attacker to double-spend cryptocurrency by reversing or preventing transactions from being confirmed.
  • A 51% attack on the Bitcoin network is near impossible because of the integrity and size of the blockchain network. Such an attack would also require immense financial resources. However, smaller networks such as Ethereum Classic are more vulnerable.

Related Blockchain Business Frameworks

Web3

web3
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

blockchain-protocol
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

hard-fork
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

merkle-tree
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Nothing-at-stake

nothing-at-stake-problem
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

51%-attack
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

application-binary-interface
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake

proof-of-work-vs-proof-of-stake

Proof of Activity

proof-of-activity
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

DAO

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

smart-contracts
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

history-of-bitcoin
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.

Altcoins

altcoin
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Ethereum

ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

blockchain-flywheel
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.

Solana

solana-blockchain
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Polkadot

polkadot-token
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.

Filecoin

filecoin
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.

Brave

bat-token
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

decentralized-exchange-platforms
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

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