Many supporters have come to see bitcoin as a model of the perfectly secured digital good.
This view owes itself in no large part to the blockchain, the distributed database that secures units of the digital currency by allowing miners to add and verify transactions without a third party. But, as has long been detailed by academics, the balance of incentives that keeps the blockchain in operation is ever at risk of disruption.
Perhaps the most infamous potential attack, known as a '51% attack', would find a single entity introducing a version of the blockchain that it controls and is accepted as valid. While academics have argued attacks can be carried out with a smaller percentage of the network, at 51% of the hashrate, such an attack would be almost guaranteed to work.
To date, this threat has reared its head rarely, but new changes to how the bitcoin network incentivizes key participants have stoked fears that a 51% attack could again become viable.
For example, some are worried that the upcoming decline in the number of new bitcoins minted daily will lead to a corresponding drop in the number of miners that today rely on this income to pay for their operations, thus securing the blockchain. Miners compete to add new blocks to the blockchains, receiving newly minted bitcoins as a reward.
Expected to occur on 9th July, the event brings this theoretical attack into context, given that exactly what will happen when the halving point is reached is unknown.
Practically, with fewer bitcoins being produced per block (from 25 BTC today to 12.5 BTC after the halving), the reward for mining may also be reduced by half, should the price of bitcoin fail to increase. This has led to concerns that smaller miners could be driven out of business, further concentrating the share of the marketplace controlled by the biggest players.
While the general feeling is that a 51% attack is unlikely, it is still worth looking at why the threat is a concern for the bitcoin network, as well as all blockchains that rely on an economic incentive for participants.
Understanding how a bad actor can affect the bitcoin community as a whole can help to shed light on the vulnerabilities that lie in blockchain-based networks – and what can be done to reduce them.
Bitcoin's mining makeup
As of today, transaction verification on the bitcoin blockchain can already be seen as being controlled by a small number of influential participants.
As of early June, 70% of all hashrate came from just four Chinese mining pools: F2Pool, Bitmain's AntPool, BTCC Pool and BW.com, a percentage that, combined, represents a majority control of the bitcoin market.
For some, this has long been seen as a failing in bitcoin's design, as it was ultimately supposed to serve as an egalitarian platform where anyone who owned a computer could join and profit from the network.
Whole other blockchain networks have been founded, and alternative technologies created, in an attempt to solve this perceived issue.
So, what does this mean in practice? Should bitcoin's leading participants band together to act in self interest, it could mean that the authenticity of the bitcoin ledger could be compromised.
As demonstrated in a 2014 paper from Cornell University, a colluding minority that intentionally forks the blockchain by keeping their block discovery private can create a situation where other miners find all of their efforts for naught.
This is important as the blockchain remedies conflict between varying versions through contrast; when comparing two blockchains, the longer blockchain is considered the most authentic. A longer private forked branch can – theoretically – give the colluding minority that controls it the power to approve or reject transactions as they seem fit.
This presents the potential to put a blockchain squarely in the control of a centralized authority. While this remains a theoretical possibility, the mining pool Ghash.io did reach 50% of the network’s total in 2014.
To some, events like this mean that network decentralization remains a priority.
"Centralization of miners could definitely pose a threat to bitcoin,” said Adam Draper, the managing director of Boost VC. "It’s a reflection of how human nature can play a role in even the most mechanical of creations."
Still, when asked, most bitcoin advocates feel that a 51% attack is not really a realistic threat to bitcoin security, if only because it is economically self-destructive.
In the face of the upcoming halving, market observers like Marco Streng, CEO of Genesis Mining, who operates a hosted mining service, believe that bitcoin's market is likely to consolidate even further.
"The upcoming halving certainly increases contraction of the hashpower to fewer large scale mining farms that are built up at places with the lowest electricity costs and optimal infrastructure for mining," he said.
Streng went on to add that while the major miners could create centralized authority, doing so would betray the individual miners’ market share. According to Streng, the miners are motivated by profit to stay separate entities.
Stephen Holmes, the CTO of the Digital Banking Lab at IT consultant VirtusaPolaris, agrees with Streng. He added that a 51% attack only works if the attacker is willing to sabotage the very currency it controls.
But there are some who believe such large-scale threats are worth monitoring, given that, one day, the goal is for large entities, even whole nation states, to participate in running bitcoin.
Say, for example, that China was to follow Ecuador’s lead and create virtual money based on the yuan? Would it be unthinkable to think that domestic mining pools may collude with the wishes of the state if enough pressure is applied?
These are considerations that might need to be considered when looking at the possible future of the technology.
Ultimately, the true threat in any commercial endeavor is those that would take advantage of it for their own gain.
As anyone that has organized any large group can attest, there is nothing that can really be done to exclude those that – as Michael Caine put it in the film "The Dark Knight" – "just want to watch the world burn".
Still, smaller threats may be just as notable.
When polled on what is the true threat to bitcoin users, many identified bitcoin theft as the most pressing issue.
"The more likely threat comes from exchanges and wallets getting compromised, resulting in stolen coins," said Arian Evans, vice president of product strategy at cloud-based security firm RiskIQ.
As this illustrates, the true fate of a cryptocurrency lies in the good faith of its users, and given the scarcity of bitcoin, an available supply that is dynamic enough to support new additions to the community.
Ultimately, as fiat currency is subject to theft and counterfeiting, bad actors will try to find a way to exploit cryptocurrencies for their own purposes, meaning threats like the 51% attack will always be a concern.
“It is something to be aware of and keep our eyes on.”
Chess piece image via Shutterstock