Bitcoin halving is approaching, and the 51% attack issue resurfaces

Many Bitcoin supporters have come to see the digital currency as a perfect and secure digital commodity.

That view is largely due to the blockchain, the distributed database that secures bitcoin by letting miners add and verify transactions without a third party. But the balance of incentives that keeps the blockchain running is at risk of being disrupted, as detailed by academics.

Perhaps the most notorious potential attack, the '51% attack', would introduce a single entity to a blockchain and control it. While academics consider the attack to be unlikely, it would almost certainly work with 51% of the hashing power.

Today, 51% attacks rarely rear their ugly head, but with new changes in the Bitcoin network’s incentives, there’s a chance that 51% attacks will become feasible again.

For example, some are concerned that the upcoming halving could lead to a corresponding reduction in the number of miners, who are needed to ensure the security of the Bitcoin network.

The Bitcoin halving, which is expected to occur on July 9, brings this theoretical attack into context, as it is unclear what exactly will happen and when the halving will occur.

In fact, as the number of bitcoins generated on each block decreases (from the current 25 BTC to 12.5 BTC after halving), if the price of bitcoin fails to rise, the mining rewards received by miners will be reduced by half. This is likely to cause small miners to give up mining, which will further concentrate the market share in the hands of large players.

While it’s generally accepted that a 51% attack is impossible, it’s still worth looking at why the Bitcoin network, and all blockchains that rely on this economic incentive model, should be concerned about 51% attacks.

Understanding how bad actors might influence the Bitcoin community as a whole can help reveal vulnerabilities that exist in blockchain-based networks and how to mitigate them.

Bitcoin Mining

Today, transaction validation on the Bitcoin blockchain can be seen as being under the control of a small number of influential actors.

At the beginning of June, four Chinese mining pools controlled 70% of the total network computing power: F2Pool, Bitmain's Antpool, BTCC Pool and BW.com Pool. If these computing powers are combined, it means that they can control the Bitcoin market.

For some, the situation is seen as a failure of Bitcoin’s design, as it was always conceived as an egalitarian platform where anyone with a computer could join and profit from the Bitcoin network.

Other blockchain networks have now been created and alternative technologies have been created to address this known problem.

So what does this mean? If the major Bitcoin players were to act in concert to their own advantage, it could mean the authenticity of the Bitcoin ledger could be compromised.

As demonstrated in a 2014 paper from Cornell University, a colluding minority could intentionally fork the blockchain by hiding discovered blocks, rendering the efforts of other miners in vain.

This is important because blockchains are compared to correct conflicts between versions. When two blockchains are compared, the longer one is considered the most authentic. A longer private fork of a blockchain could - in theory - give the colluding group the ability to approve or reject transactions as they wish.

This could put the blockchain directly under the control of a centralized organization. Although this is only a theoretical possibility, in 2014, the Ghash.io mining pool once controlled 50% of the total network computing power.

To some, these events mean that decentralizing the web remains a priority.

“The centralization of miners is certainly a threat to Bitcoin,” said Adam Draper, managing director of Boost VC. “It reflects how human nature plays a role in even the most mechanical of creations.”

Political influence

However, most Bitcoin supporters believe that a 51% attack is not a realistic threat to Bitcoin security because such an attack would mean economic self-destruction.

Faced with the upcoming Bitcoin halving, market observers such as Genesis Mining CEO Marco Streng believe that the Bitcoin market may further consolidate.

“The upcoming halving will indeed cause the hash rate to contract toward a small number of large mining companies, which are based in regions with low electricity costs and good mining equipment,” he said.

Strom went on to say that while large miners may establish centralized authority, such a move would also betray the market share of individual miners, who, Strom believes, are motivated by profit to remain independent entities.

Stephen Holmes, CTO of the Digital Banking Lab at IT consultancy VirtusaPolaris, agreed with Strom, saying a 51% attack would only be effective if the attacker wanted to undermine the digital currency.

However, some believe that this threat is so large that it deserves to be monitored because Bitcoin aims to allow large entities and even entire countries to participate in its operation.

For example, if China were to create a virtual currency based on the yuan, it would be unthinkable if Chinese mining pools were pressured to cooperate with the government.

These are all things that should be taken into consideration when looking at the future development of this technology.

Those with bad intentions

Ultimately, in all business, the real threat comes from those who only care about their own interests.

Anyone who has organized a large group can attest that it is impossible to truly exclude those who, as Michael Caine said in the movie Batman: The Dark Knight, 'just want to see the world destroyed.'

A threat with a low probability may be so harmful.

When investigating what the real threats are for Bitcoin users, many people cite Bitcoin theft as the most pressing issue.

"The threat to Bitcoin is more likely to come from compromised exchanges and wallets, which can result in the loss of Bitcoin," said Arian Evans, vice president of product strategy at cloud security company RisklQ.

This shows that the true fate of a cryptocurrency lies in the good faith of its users. Given the scarcity of Bitcoin, one available supply is more than enough to support the community.

Just as fiat currencies are subject to theft and counterfeiting, these bad actors will try to find ways to use these cryptocurrencies for their own purposes, which means that 51% attacks will always be a problem.

Adam Draper, managing director of Boost VC, added: “This is something to watch out for and keep your eyes open.”