A 51% attack: the sum of all fears?

Recently multiple cryptocurrencies have faced increasing risks of a so-called 51 percent attack. A 51 percent attack refers to the situation where a single entity controls the majority of the network’s mining hashrate, and uses it to malicious purposes.

Litecoin miners were urged to leave the Coinotron mining pool when its hashrate edged towards 51 percent. The unrest in the Dogecoin community regarding its future mining schedule was based on the chance that it could currently lead to an increased risk of a successful 51 percent attack. Last Friday, even Bitcoin had to face a mining pool taking control over 51 percent of its network. GHash.io touched the feared mark on Friday morning, giving it the possibility of exercising complete control over the network and manipulating the public ledger. Even though it concerns a theoretic possibility, and mining pools are not likely to attack their own source of income, it shows that there is still a lot of development work to be done.

Proof of Work incentives

The main focus should be on the Proof of Work (PoW) mining that has led to the current situation. PoW mining is not just an energy-wasting process, it is also an extremely competitive process by nature. Participants are constantly tempted to improve their mining efficiency, which forces other to join in an arms race or drop out. It leads to a situation where profit maximization is not just desirable, but also a necessity. As increasing scale means more costs benefits, hashrate will cluster together. GHash.io is widely known for its zero percent fee structure, attracting many miners looking to optimize their cost efficiency.

Large mining pools are also better capable of producing an optimal flow of revenues. Pools with 50 percent and 5 percent of the total hashrate will receive a proportional share rewards in the long run. Yet, the bigger the share of the total hashrate, the more steady this flow will be. The smaller pool might be unlucky on the wrong moment, for example right before an increase of difficulty, which could cause it to miss out on a few coins. It might not be a lot, but as each penny matters more and more these details become significant. All together it causes a centralizing effect on a coin that was meant to be decentralized.

Doomsday scenario

This also means that certain pools touching 51 percent of a network are not isolated incidents. Large pools capable of controlling the majority of the network are the logical outcome of a fierce fight to survive amid a competitive environment. As stated, these pools will not likely to attack their own source of income. Even if they do, prices would crash and they would not be able to profit much. But imagine a malicious entity taking control over such a pool. Cyberterrorists could cause serious mayhem on the network. Obama recently named cyberterrorism as the country’s biggest threat, so it does not seem like an unthinkable scenario.

Right now, there is no reason to assume such a doomsday scenario is about to happen. Cryptocurrencies are only a very small part of the international payment systems and hence not an extremely attractive target. But if cryptocurrencies want to become more important, this is an issue that will have to be addressed first.