Learn Cryptocurrency
31 Jan 2022

What is a 51% Attack, and Why it Matters in a World Brimming with New Crypto Projects?

Ananda Banerjee

Imagine a scenario where five friends randomly decide to vote on how they want to collectively spend their weekend evening. Each of them will propose an activity of their choice, and the activity getting the majority of votes will be taken up, eventually. But, what if one friend decides to take at least two more in confidence, only to manipulate voting and influence the decision?

Something like that sabotages the transparency of the group’s voting and consensus process. And that is exactly what we shall discuss throughout this article.

Key Takeaways

  • 51% attacks are also known as majority attacks

  • These attacks mainly target networks with fewer participants

  • A majority attack can take control of the mining setup

  • A 51% attack isn’t likely as most new crypto projects have failsafe consensus algorithms in place

  • Ethereum Classic and Bitcoin SV are the common names associated with these majority attacks

  • Most 51% attacks are not practicable or likely but still possible

Blockchain networks are popular due to their decentralized nature. This means the power to make decisions within the blockchain ecosystem is well distributed, with no single entity being in charge of validating transactions. A 51% attack defeats this ingrained concept by shifting more than half of the blockchain’s validating power to a single entity or group.

And in an ecosystem hinged towards transparency and distributed allocation of resources, power, and privileges, access to over 50% of anything can be catastrophic.

But there is more to a 51% attack than what meets the eye. And if you are interested in learning everything of relevance, with analogies, explanations, and even relatable stories, keep reading on.

51% attack facts

What is a 51% Attack?

A blockchain network has miners using computational resources to verify transactions. In an ideal ecosystem, the miners are spaced out rather randomly. The somewhat even distribution ensures that validations and verifications are transparent and not manipulated. Also, in a blockchain, a valid transaction must have gained consensus from the majority of miners.

Yes, only if the majority of the distributed computers and miners say that a transaction is good to go, it gets added to the ledger and becomes immutable. As the name suggests, a 51% attack occurs when more than 51% of the mining resources get compromised or controlled by a single entity.As 51% constitutes the majority, validating and canceling transactions become possible.

Key Terms

To understand how an attack like this works, some key terms and concepts need explanation.

Blockchain schematics and decentralization

A blockchain network, regardless of how it operates, is decentralized and has miners spaced out uncompromisingly. Once a transaction is initiated in the chain, it needs the majority of active participants to verify the same.

But transaction validators do not come forward due to the goodness of heart. Instead, they get rewards for successfully verifying each transaction. The rewarding mechanism and value depend on the blockchain itself.

Mining, miners, and mining pools

In a Proof-of-Work (PoW) intensive blockchain, like Bitcoin and Ethereum, verifying a transaction requires people to solve a mathematical and computational power-intensive problem. Once the problem is solved, the transaction is validated, and rewards are forwarded to the mining setup concerned.

Mining, therefore, creates a new block and results in BTC minting. People who deploy their computational resources for mining in the hope of reaping the rewards are termed ‘miners’. Some miners often work in tandem to make a lot of computational power available, and such consortiums are termed Mining Pools.

Hash rate

In PoW blockchains, everything boils down to the computational power available. Hashing power or hash rate signifies the same and relates to the usable mining power around.

Staking

Proof-of-Stake ecosystems, like Cardano and Solana, have validators instead of miners. These validators do not use computational power but stake their existing native tokens to be able to participate in ecosystem-related tasks like transaction verification.

How Does the Attack Take Place?

Now that we have a better understanding of how things usually work, let us return to the matter at hand and try to understand how attacks happen. A 51% attack can take place in both Proof-of-Work (PoW) and Proof-of-Stake (PoS) blockchains.

In a PoW ecosystem, a majority attack occurs when a select mining pool becomes big enough to supply 51% of the total computational power to the network. Once this feat is achieved, the ‘Mining Pool’ can take decisions exclusively and without having to wait for other miners and their validations.

In a Proof-of-Stake blockchain, validators can initiate a 51% attack if a group manages to hold 51% of the staking value.

Threats Related to a 51% Attack

A majority attack can show up with a handful of associated threats, including:

Network disruption

A 51% attack inadvertently causes the network to act up as transparency gets thrown out the window. In such an ecosystem, it becomes extremely difficult to conduct transactions, as attackers can use the mining power to rewrite some transactions or even cancel them, which in turn causes frustration to pile up among investors.

Double spending

A standard and sane blockchain has multiple validators looking at a transaction to see whether the token has actually been spent or not. In a compromised one, the attacker or attackers can cancel or reject transactions of their choice. And once this happens, tokens relevant to the canceled transactions are refunded and can be used again.

Mining monopoly

A majority attack can lead to a mining monopoly within the ecosystem. For highly incentivized blockchains like Bitcoin, mining monopoly means getting hands-on all the mining or block generating rewards.

Biased network decisions

Blockchains follow the concept of democratic governance. What this means is that Blockchain programming automatically hinges on the longest chain of blocks as they look legitimate. Attackers can create their own blocks faster by verifying transactions at will. Therefore, if the majority attack is allowed to breed for long, corrupt mining pools can create a soft fork of sorts to move unwitting participants to their corner.

This faulty approach can lead to biased decisions and the overall failure of the blockchain’s inherent motto – transparency. And it can impact DAOs (Digital Autonomous Organizations) the worst.

What a Majority Attack Cannot Achieve

A 51% attack does sound scary. However, all is not lost in case such an attack is initiated, as these corrupt miners and validators still cannot cause:

Modification of mining awards

Mining and staking rewards relevant to a blockchain are ingrained in the code and are, therefore, immutable.

Creation of new coins without mining

No new coins can be created out of thin air as it would violate the tokenomics of the concerned chain.

Reversing confirmed transactions

Even though some transactions can be cancelled via the mining monopoly, it is theoretically and practically impossible to reverse immutable transaction chains that are fed to the blockchain ledger.

Likelihood of a 51% Attack?

Controlling 51% of network resources, computational power, and funds is exceedingly difficult. Therefore, if the blockchain is as extensive as Bitcoin or Ethereum, it isn’t easy to attack it in any given way. But, smaller blockchains with Proof-of-Work mechanisms are still termed vulnerable. In such cases, it all comes down to the availability of the mining hardware and technology relevant to the blockchain concerned.

Real-Time Examples of a 51% Attack

Bitcoin Gold or the BTG network, a hard fork of the original Bitcoin network, faced a 51% attack in 2018 and 2020. The latest fork to be attacked in a similar manner was BSV or Bitcoin SV, in 2021. The hard-forked ecosystems have smaller spreads and, therefore, are easier to attack.

However, the famous DAO attack in 2016, relevant to the ETC or Ethereum Classic ecosystem, happens to be one of the major proponents of the majority attack.

How Can Investors Protect Themselves?

A majority attack is a threat to the blockchain itself. Therefore, it becomes important for the investors to take a cautionary stand beforehand. Below are some steps one can follow to steer clear of such a situation.

Identify projects with potential

A good start is to identify promising projects by ‘Doing Your Own Research’ (DYOR). As part of the DYOR strategy, you must look to pick crypto projects with relevance, a sustainable consensus mechanism, and even deflationary tokenomics to ensure periodic token burning.

Massive network size is always good

It is always good to be associated with top crypto players like Bitcoin and Ethereum. It is their massive network size that makes majority attacks practically impossible.

Proof-of-Stake trumps Proof-of-Work

It is still difficult to get hold of 51% of the network’s computational power in the case of a PoW blockchain. However, it is even harder to be in charge of 51% of network stakes or funds. And for this reason, PoS projects are safer.

Watch out for whale accounts

Even if you are into Proof-of-Stake blockchains, it is important to select projects that have minimal whale holdings. Whales accounts can stake and might have it in them to pull off majority attacks.

Diversify your crypto portfolio

In the end, it is good to keep the crypto portfolio diversified by putting your faith in multiple major crypto players, credible Proof-of-Stake projects, and even a handful of assets that have different crypto consensus mechanisms driving the blockchain.

Keep an eye on the wallet

A 51% attack can open up the blockchain to larger threats. Therefore, as an investor, you must keep away from phishing links, use separate wallet addresses, rely more on a hardware wallet, and even manage the wallet properly to thwart crypto hackers.

Wrap-Up

A 51% or majority attack is unlikely as blockchains are coded to scale beyond threats as such. However, ideological attacks with powerful whales or hardware backing up the same cannot be completely discounted, even in a space replete with naysayers.

If you are a miner or staker, it is your job to keep the funds and resources safe. And if you are an investor, it is better to keep researching and tracking the blockchain of preference to get ahead of these speculative threats.

Are you looking to learn about other complex crypto concepts like the 51% attack? Well, you can always learn and read more CoinSwitch.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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