Is sharing algorithms dangerous? Unless you have enough computing power

Last week, Charlie Lee said that Litecoin (LTC) controls 98% of the hash rate of its "Scrypt" mining algorithm, which is crucial to LTC's security. Meanwhile, other currencies such as Bitcoin Cash (BCH) and Bitcoin SV (BSV) that have minority control over the algorithm still face a higher risk of malicious attacks.

Controlling the majority of computing power for Scrypt or other algorithms plays an important role in maintaining the security of the network and preventing malicious mining attacks from illegally obtaining cryptocurrencies.

Malicious mining attacks

Game theory plays an important role in well-designed cryptocurrencies. Unlike previous technologies, some cryptocurrencies use economic incentives to ensure that participants are honest and that the network is highly resistant to bad actors. When these incentives are misaligned, the system breaks down.

One of the little-known facts about PoW cryptocurrencies is the importance of dominant hashrate in a particular mining algorithm.

Generally speaking, we know that if a miner can obtain the majority of the computing power of a cryptocurrency (51% of the computing power), then it can perform malicious attacks on the network.

The most common form of attack is to refuse to accept blocks mined by others, allowing a single miner to receive all block rewards. Other more complex attacks include refusing transactions and attempting to double spend.

Ethereum co-founder Vitalik Buterin introduced another more bizarre attack mode - selfish mining, in which miners with less than 25% of the computing power can force other miners to form an alliance with them by manipulating the block production pattern.

For smaller coins, it is even easier to launch the above attacks because large miners can easily control more than 50% of the computing power of small coins compared to mainstream coins.

That being said, even if a miner controls the majority of computing power, they still have an incentive to mine honestly. Sia co-founder David Vorick once wrote in an article that malicious miners need to take huge risks.

Other stakeholders in the network can limit the impact of malicious miners. For example, in the Bitcoin network, full nodes can reject blocks from malicious miners, Vorick said.

The value of the cryptocurrency attacked by the miner could also drop significantly, affecting the long-term profitability of the miner. This is not to mention the reputational damage that the miner may face.

Vorick said:

"Simply put, this attack really doesn't make a lot of sense from an economic perspective because there isn't enough upside for the attacker."

In a sense, ASICs are like collateral between miners and the cryptocurrency networks they support. If miners attack a coin that dominates its mining algorithm, it will affect the value of that coin. This will reduce the value of subsequent block rewards and therefore reduce the long-term benefits and value of that ASIC miner, provided they cannot switch to another coin.

In summary, unless the short-term revenue gained from double-spending, hoarding block rewards, and rejecting transactions outweighs the risk of failure and long-term damage to revenue, it makes no sense for miners to launch an attack.

Small currency plundering attacks

Still, in some cases, economics actually encourages malicious attacks on cryptocurrencies — especially when a coin accounts for only a minority of the hashrate on a particular algorithm.

When two or more cryptocurrencies use the same mining algorithm, it is impossible for them to hold exactly the same proportion of hashrate. Take Bitcoin, for example, which controls 90% of the SHA-256 algorithm's hashrate, while BCH, BSV, and all other forks control less than 10%. Another extreme example is Zcash, which holds 98% of the Equihash algorithm's hashrate, with the remaining 2% distributed among currencies such as Horizen (formerly Zen) and Hush.

In these cases, it is possible for miners to switch from mining the dominant coin (such as Bitcoin) to another coin (such as BCH) and carry out an attack.

The reason is: there are fewer economic penalties for such behavior. As mentioned above, malicious attacks usually reduce miners' long-term income. When miners attack a currency with a small share of computing power in a certain algorithm, the reduction in long-term income may be negligible.

These attacks not only affect ASICs, but have become a problem for general-purpose hardware. CPUs and GPUs have a healthy secondary resale market. Many currencies are also designing their own mining algorithms in hopes of competing with these devices. Therefore, miners can attack and switch at any time with impunity.

In these cases, a miner can switch to a coin with a lower hashrate and outright plunder. After the market is flooded with fake coins, the miner can then go back to mining the dominant coin while making a healthy profit.

These attacks aren’t just theoretical. Ethereum Classic and Zen both suffered 51% attacks due to the phenomenon described above. BCH and BSV also suffered similar attacks during the split and subsequent hash war.

These considerations are extremely important for investors looking to hold cryptocurrencies, especially altcoins. Assessing whether a cryptocurrency is at risk of being attacked by a mining operation, or is relatively safe like Bitcoin, has important implications for long-term returns.